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DOD EXCESS PROPERTY SYSTEMS: THROWING

AWAY MILLIONS

HEARING

BEFORE THE

SUBCOMMITTEE ON NATIONAL SECURITY,

EMERGING THREATS, AND INTERNATIONAL

RELATIONS

OF THE

COMMITTEE ON

GOVERNMENT REFORM

HOUSE OF REPRESENTATIVES

ONE HUNDRED NINTH CONGRESS

FIRST SESSION

JUNE 7, 2005

Serial No. 109–51

Printed for the use of the Committee on Government Reform

(

Available via the World Wide Web: http://www.gpoaccess.gov/congress/index.html

http://www.house.gov/reform

(II)

COMMITTEE ON GOVERNMENT REFORM

TOM DAVIS, Virginia, Chairman

CHRISTOPHER SHAYS, Connecticut

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

JOHN L. MICA, Florida

GIL GUTKNECHT, Minnesota

MARK E. SOUDER, Indiana

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

CHRIS CANNON, Utah

JOHN J. DUNCAN, JR., Tennessee

CANDICE S. MILLER, Michigan

MICHAEL R. TURNER, Ohio

DARRELL E. ISSA, California

GINNY BROWN-WAITE, Florida

JON C. PORTER, Nevada

KENNY MARCHANT, Texas

LYNN A. WESTMORELAND, Georgia

PATRICK T. MCHENRY, North Carolina

CHARLES W. DENT, Pennsylvania

VIRGINIA FOXX, North Carolina

——— ———

HENRY A. WAXMAN, California

TOM LANTOS, California

MAJOR R. OWENS, New York

EDOLPHUS TOWNS, New York

PAUL E. KANJORSKI, Pennsylvania

CAROLYN B. MALONEY, New York

ELIJAH E. CUMMINGS, Maryland

DENNIS J. KUCINICH, Ohio

DANNY K. DAVIS, Illinois

WM. LACY CLAY, Missouri

DIANE E. WATSON, California

STEPHEN F. LYNCH, Massachusetts

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

BRIAN HIGGINS, New York

ELEANOR HOLMES NORTON, District of

Columbia

———

BERNARD SANDERS, Vermont

(Independent)

MELISSA WOJCIAK, Staff Director

DAVID MARIN, Deputy Staff Director/Communications Director

ROB BORDEN, Parliamentarian

TERESA AUSTIN, Chief Clerk

PHIL BARNETT, Minority Chief of Staff/Chief Counsel

SUBCOMMITTEE ON NATIONAL SECURITY, EMERGING THREATS, AND INTERNATIONAL

RELATIONS

CHRISTOPHER SHAYS, Connecticut, Chairman

KENNY MARCHANT, Texas

DAN BURTON, Indiana

ILEANA ROS-LEHTINEN, Florida

JOHN M. MCHUGH, New York

STEVEN C. LATOURETTE, Ohio

TODD RUSSELL PLATTS, Pennsylvania

JOHN J. DUNCAN, JR., Tennessee

MICHAEL R. TURNER, Ohio

JON C. PORTER, Nevada

CHARLES W. DENT, Pennsylvania

DENNIS J. KUCINICH, Ohio

TOM LANTOS, California

BERNARD SANDERS, Vermont

CAROLYN B. MALONEY, New York

CHRIS VAN HOLLEN, Maryland

LINDA T. SANCHEZ, California

C.A. DUTCH RUPPERSBERGER, Maryland

STEPHEN F. LYNCH, Massachusetts

BRIAN HIGGINS, New York

EX OFFICIO

TOM DAVIS, Virginia HENRY A. WAXMAN, California

LAWRENCE J. HALLORAN, Staff Director and Counsel

J. VINCENT CHASE, Chief Investigator

ROBERT A. BRIGGS, Clerk

ANDREW SU, Minority Professional Staff Member

(III)

C O N T E N T S

Page

Hearing held on June 7, 2005 ................................................................................. 1

Statement of:

Estevez, Alan F., Assistant Deputy Under Secretary of Defense (Supply

Chain Integration), Department of Defense; Major General Daniel

Mongeon, Director for Logistics Operations, Defense Logistics Agency;

and Colonel Patrick E. O’Donnell, Commander, Defense Reutilization

and Marketing Service, Department of Defense ........................................ 65

Estevez, Alan F. ........................................................................................ 65

Mongeon, Major General Daniel .............................................................. 82

O’Donnell, Colonel Patrick E. ................................................................... 93

Kutz, Gregory D., Managing Director, Forensic Audits and Special Investigations, U.S. Government Accountability Office, accompanied by

Gayle L. Fischer, Assistant Director, Forensic Audits and Special Investigations; John J. Ryan, Assistant Director/Special Agent, Forensic Audits and Special Investigations; and Keith Rhodes, Chief Technologist,

Applied Research and Methods ................................................................... 11

Letters, statements, etc., submitted for the record by:

Estevez, Alan F., Assistant Deputy Under Secretary of Defense (Supply

Chain Integration), Department of Defense, prepared statement of ........ 68

Kutz, Gregory D., Managing Director, Forensic Audits and Special Investigations, U.S. Government Accountability Office, prepared statement

of ..................................................................................................................... 14

Mongeon, Major General Daniel, Director for Logistics Operations, Defense Logistics Agency, prepared statement of ........................................... 84

O’Donnell, Colonel Patrick E., Commander, Defense Reutilization and

Marketing Service, Department of Defense, prepared statement of ........ 95

Shays, Hon. Christopher, a Representative in Congress from the State

of Connecticut, prepared statement of ........................................................ 3

Waxman, Hon. Henry A., a Representative in Congress from the State

of California, prepared statement of ........................................................... 6

(1)

DOD EXCESS PROPERTY SYSTEMS:

THROWING AWAY MILLIONS

TUESDAY, JUNE 7, 2005

HOUSE OF REPRESENTATIVES, SUBCOMMITTEE ON NATIONAL SECURITY, EMERGING

THREATS, AND INTERNATIONAL RELATIONS, COMMITTEE ON GOVERNMENT REFORM, Washington, DC.

The subcommittee met, pursuant to notice, at 2:15 p.m., in room

2154, Rayburn House Office Building, Hon. Christopher Shays

(chairman of the subcommittee) presiding.

Present: Representatives Shays, Duncan, Dent, and Waxman.

Staff present: Lawrence Halloran, staff director and counsel; J.

Vincent Chase, chief investigator; Robert A. Briggs, clerk; Sam

Raymond, intern; Andrew Su, minority professional staff member;

Earley Green, minority chief clerk; and Jean Gosa, minority assistant clerk.

Mr. SHAYS. A quorum being present, the Subcommittee on National Security, Emerging Threats, and International Relations

hearing entitled, ‘‘DOD Excess Property Systems: Throwing Away

Millions’’ is called to order.

Following the frugal maxim, ‘‘One man’s trash is another man’s

treasure,’’ the Department of Defense [DOD], sells or donates

equipment and commodities determined to be in excess of military

needs. But now we find the Pentagon is throwing out a great deal

of treasure with the trash, disposing of items at steep discounts

through one program while other offices within DOD buy the same

things new and at full price.

Problems in the DOD excess property system are chronic, they’re

dangerous, and extensive. Three years ago this subcommittee discovered DOD continued to sell top-grade chemical protective suits

on the Internet while military units were waiting to acquire exactly

the same gear at 10 times the on-line cost. In 2003, we revealed

the indiscriminate sale of biological lab equipment by DOD without

an assessment of the risks it might be used against us by terrorists. Today, the true scope and costs of systemic weaknesses in the

surplus supply chain come into clearer view.

At the subcommittee’s request, the Government Accountability

Office [GAO], extensively audited and tested DOD excess property

systems. Their report released this afternoon finds substantial

waste and inefficiencies intractably embedded in sloppy, uncoordinated management and inventory control processes. The numbers

we will hear are staggering. Each year DOD disposes of property

that costs billions to acquire, yet GAO found at least $400 million

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spent over 2 fiscal years on the purchase of items that need not

have been bought at all because they were already paid for and

available in that surplus pool. Many of the items here today fit

that description, good-as-new or serviceable equipment that DOD

sold to GAO for a fraction of the price it was paying to buy the

same material.

This isn’t just a matter of bad bookkeeping, lax management or

weak inventory controls, these numbers measure major systemic

weaknesses in critical combat support machinery. Waste on this

scale affects our ability to meet the immediate needs of men and

women in uniform. The $400 million spent on unneeded equipment

could have bought body armor, medical supplies, or more than

1,700 fully armored Humvees to protect Coalition forces against

deadly improvised explosive devices.

Simply put, DOD buys too much and then cannot, with any accuracy, track where the excess property is or who might need it. Once

dropped into the multi-billion dollar slurry of the excess property

system, good equipment can mix with bad, get left out in the rain,

or disappear altogether. Such an unaccountable system easily hides

malfeasance and invites theft.

Some broken links in this clumsy and costly chain of custody are

well known. For more than a decade, GAO has found that DOD

asset visibility and inventory management weaknesses pose a huge

risk of waste, abuse and fraud. Now we find DOD’s bargain basement is leaking badly, hemorrhaging on a scale that no business

could or would tolerate.

The time is long past for standard approaches and marginal fixes

to a fundamentally broken system. As supplier to the warfighter

and stewards of immense fiscal resources, DOD must have end-toend visibility and control over the purchase, transportation, storage, use and final disposition of military inventory. Those who buy

too much this year have to know they will pay a price when the

equipment appears for sale on the Internet next year for one-tenth

the acquisition cost.

We are grateful to the GAO team for an in-depth report on a

very serious problem, and we look to our DOD witnesses for a discussion of equally serious solutions.

At this time, the Chair would recognize the ranking member of

the full committee, Mr. Henry Waxman.

[The prepared statement of Hon. Christopher Shays follows:]

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Mr. WAXMAN. Thank you very much, Mr. Chairman. I’m glad the

subcommittee is holding this hearing today on procurement problems at Defense, and I commend you for your leadership on this

issue.

I’m going to be blunt in my remarks. This administration is

squandering literally billions of dollars on wasteful Federal contracts. Private contractors are reaping a bonanza while taxpayers

are being gouged. Whether the explanation is gross incompetence

or deliberate malfeasance, the result is the same: Taxpayers are

being vastly overcharged.

The litany of this administration’s mismanagement of Federal

contracts is long and costly. The value of no-bid contracts has skyrocketed under the Bush administration. Oversight of Federal contracts has been turned over to private companies with blatant conflicts of interest, and when government auditors do find abuse their

recommendations are ignored.

Nearly every week the papers are full of stories of contract

abuse. The Department of Homeland Security has wasted hundreds

of millions of dollars on security contracts that have produced virtually no result. The FBI has spent $170 million on virtual case file

software that doesn’t work. And in Iraq, Halliburton has overcharged by hundreds of millions of dollars, yet the administration

continues to shower the company with Federal funds, bonuses and

special treatment.

Unfortunately, these are not isolated incidences, they are a pattern of wanton abuse and mismanagement.

In today’s hearing we will hear about a particularly egregious example of abuse. GAO tells us that the Pentagon has squandered

$31⁄2 billion in valuable new equipment by selling it off at fire-sale

prices. But in Iraq, our soldiers are dying because we cannot find

the resources to buy the proper armor for our troops and their vehicles.

But here in the United States, the Pentagon has sold off billions

of dollars worth of medical equipment, power supply units, helicopters, vehicle parts, combat boots, and even military medals at

salvage prices.

And these examples are the rule, not the exception. According to

GAO, the Defense Department gets fair value for surplus Federal

property just 12 percent of the time. The rest of the time the Defense Department has destroyed perfectly good equipment or sold

it for pennies on the dollar.

Congress has a responsibility to do oversight to prevent these

abuses. That’s why I commend Chairman Shays for holding this

hearing. But we also need legislation, and for this reason I will

soon be introducing the Clean Contracting Act to stop these indefensible procurement and disposal practices.

I want to thank the chairman for requesting the GAO report that

is the subject of today’s hearing, as well as the ranking member of

the subcommittees, and I especially want to thank Greg Kutz and

the other members of the GAO, the investigative team, for their excellent work on this important report.

Thank you, Mr. Chairman.

[The prepared statement of Hon. Henry A. Waxman follows:]

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Mr. SHAYS. Thank you, Mr. Ranking Member. The Chair would

now recognize Mr. Duncan.

Mr. DUNCAN. Well, thank you very much, Mr. Chairman. Once

again you’re out in front of and on top of a very important subject.

I commend you for calling this hearing.

I don’t know the full details, but I do understand that the report

shows that during fiscal years 2002, 2003 the GAO found that the

Department of Defense disposed of $2.2 billion worth of materials

that were reported to be in A condition, that were either brand new

and unused or barely used, and that those things were in new or

excellent condition. And I know that we talk about billions up here

like it’s so much that it becomes meaningless, but that is a lot of

money. It is an unbelievable, staggering amount of money.

I understand further that on July 30, 2003 the report says the

Department of Defense sold 172 pairs of new cold weather boots,

valued $23,220, for $69, less than a cost of one pair of shoes; that

during those years surveyed the Department of Defense destroyed

$73.7 million in circuit cards, $10.2 million in radio sets, $9.1 million in aircraft parts, $3.4 million worth of power supply units, on

and on and on; that the Department purchased at least $400 million of identical items during this time instead of using available

excess A condition items.

The Pentagon, the Department of Defense, seems to have the

idea that this Congress will give them anything it wants no matter

how terrible the job is that they do, how wasteful the job is that

they do, and maybe that’s the case but it shouldn’t be. The report

says the Defense Reutilization and Marketing Services offices that

has the responsibility for handling the express property have experienced losses of $466 million from 2002 to 2004, and that one

DRMO holding excess property had an error rate of 47 percent.

Let me tell you this: Anybody who is not horrified by this does

not deserve to call themselves a conservative; anybody that is not

horrified by this does not deserve to be called a friend of the taxpayer; anybody who is even remotely connected to this should be

ashamed. Any large business with this kind of record, their stock

would drop dramatically, heads would roll, people would be gotten

rid of.

I know that the cause of this civil service system that gives way

too much protection to people who screw up horribly, that nothing

will be done or very little will be done, but hopefully somebody will

act on this and do something about this because this type of record

should not—this type of activity should not continue to go on.

Thank you very much, Mr. Chairman.

Mr. SHAYS. I thank the gentleman very much. And just to announce that it’s our intention, as we said before, to hold a hearing

on June 21st on the U.S. Stewardship of the Development Fund for

Iraq [DFI], the successor fund to the U.N. Oil for Food Program,

which is basically Iraqi money under our stewardship. And we

know we need to be looking at that and will be.

At this time, the Chair would just welcome our first panel. We

have one speaker, Mr. Gregory Kutz, Managing Director of Forensic Audits and Special Investigations, U.S. Government Accountability Office, accompanied by Ms. Gayle Fischer, Assistant DirecVerDate 11-MAY-2000 10:38 Aug 26, 2005 Jkt 000000 PO 00000 Frm 00014 Fmt 6633 Sfmt 6633 D:\DOCS\22905.TXT HGOVREF1 PsN: HGOVREF1
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tor; Mr. John J. Ryan, Assistant Director/Special Agent; and Mr.

Keith Rhodes, Chief Technologist. We welcome all of you.

Is there anyone else that might be responding to questions, Mr.

Kutz?

Mr. KUTZ. One other.

Mr. SHAYS. So we will ask that individual to stand as well as I

administer the oath.

[Witnesses sworn.]

Mr. SHAYS. Note for the record our primary witness and those accompanying him have responded in the affirmative. And let me just

take care of one—I ask unanimous consent that all members of the

subcommittee be permitted to place an opening statement in the

record, and that the record remain open for 3 days for that purpose. Without objection, so ordered. I ask further that all witnesses

be permitted to include their written statement in the record. Without objection, so ordered.

And if I can, before you start, congratulations on a document

that helps us do our job better and will help the DOD do its job

better. We thank you for being here.

Mr. Kutz, we’re going to have a 5-minute period, and then we’ll

roll it over for another 5 minutes, but within 10 minutes I’m sure

you can cover what you need to. And then we will start with questions.

STATEMENT OF GREGORY D. KUTZ, MANAGING DIRECTOR, FORENSIC AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT ACCOUNTABILITY OFFICE, ACCOMPANIED BY

GAYLE L. FISCHER, ASSISTANT DIRECTOR, FORENSIC AUDITS AND SPECIAL INVESTIGATIONS; JOHN J. RYAN, ASSISTANT DIRECTOR/SPECIAL AGENT, FORENSIC AUDITS AND

SPECIAL INVESTIGATIONS; AND KEITH RHODES, CHIEF

TECHNOLOGIST, APPLIED RESEARCH AND METHODS

Mr. KUTZ. Mr. Chairman, Ranking Member Waxman and Congressman Duncan, thank you for the opportunity to discuss the

sale of DOD excess property.

Previously we testified that DOD was selling excess property

that could be used to produce and disseminate anthrax. We also

testified that DOD was selling new chem-biosuits on the Internet

for $3, while at the same time buying them for $200.

Based on these findings, you asked us to conduct a broader study

of the economy and efficiency of this system. Our bottom line today

is that ineffective management oversight and controls have resulted in hundreds of millions of dollars of waste and inefficiency

in the DOD excess property system.

My testimony has two parts: First, the magnitude of waste and

inefficiency, and, second, the root causes of these problems.

First, DOD reported that $29 billion of the $33 billion in excess

commodity disposals for 2002 through 2004 were unusable items,

or junk. By junk, I mean items that are in need of significant repair, obsolete, or that need to be destroyed. However, the remaining $4 billion related to items that were in new, unused and excellent condition, referred to by DOD as A condition. Of the $4 billion,

we determined that $31⁄2 billion was waste because A condition

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items were given away, sold on the Internet for pennies on the dollar, or destroyed.

Part of the $31⁄2 billion of waste is caused by a chronic DOD

problem, buying more inventory than it needs. When this happens

inventory items are warehoused until they are obsolete and ultimately declared excess. By the time these items get to the excess

property system they are no longer in demand, and thus are basically worthless.

However, we also identified, as you mentioned, at least $400 million of new, unused inventory that was sold or given away at the

same time DOD was buying the same items. By definition, new unused inventory that DOD is still buying is not excess to its needs.

This is where the excess property system failed, which resulted in

one part of DOD selling, giving away or destroying the very same

items that were needed to support our military forces.

To illustrate this waste, GAO ordered several new items at little

or new cost. Also, using our undercover credit card, we purchased

other DOD items on the Internet from govliquidation.com. We have

these items here today as the exhibits you see labeled and also on

the table, and we will show some of those on the monitors as I

walk through this.

The items that GAO ordered included a new medical instrument

chest, which is on my left, two circuit cards, which are on my right,

and two power supply units, also on my right. The power supply

units are currently used in the electronic warfare system of the

Seawolf fast attack nuclear submarine. The circuit cards are used

in secure satellite communications gear by the Navy.

We also purchased on the Internet new extreme cold weather

boots, tents, gasoline burner units, portable suction apparatus,

bandages and medical supplies, badges and insignias, Cooper tires,

and Class A military uniforms.

Let me spend a few minutes discussing the boots and the tents

so I can bring these case studies to life for you. The boots were advertised on govliquidation.com as being 30 pair that were condemned. However, when we received our order, we found that our

purchase included 42 pairs of boots of which 37 were in new, unused condition like the ones you see on my right. We paid about

$12 per pair for these boots, while DOD paid $135 per pair. Shortly

after our purchase we found that DOD had placed an order to purchase over 30,000 pair of the very same boots. In another case we

found 172 pairs of boots were sold to the Robinson Trading Co. for

40 cents a pair.

We also purchased 27 tents on the Internet for $548 that DOD

paid over $2,100 for. Although the tents were also advertised as

being condemned, when we received our order we found that our

purchase included 21 new, unused tents like the one at my left. At

the same time we made our purchase, an order had been placed for

35,000 of these same tents at a cost of $21⁄2 million. In total, we

paid about $3,000 for the items that we obtained, DOD paid over

$80,000 for these same items. All of the items displayed here today

were still being purchased and were in demand by the military

services.

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Second, the causes of waste and inefficiency included unreliable

data, inadequate management oversight and physical control, and

outdated systems.

We found significant data reliability problems, including errors

in quantity, description and condition of excess property items.

Military units have lost confidence in the reliability of excess property data and thus purchase new items instead of using items that

are in the excess property system.

With respect to automated systems, we found the lack of integration of purchasing systems and the excess property systems was a

major issue. In effect, these systems do not share data that prevents the purchase of new items that DOD already has available

in the excess property system.

Our related report included 13 recommendations to DOD related

to people, processes and automated systems. DOD is taking actions

to address all of our recommendations.

In conclusion, with the serious fiscal challenges facing our Nation

and with our forces fighting the global war on terrorism, the government can’t afford to be giving away inventory that it’s buying

at the same time. No doubt many of the businesses that profit from

this hidden subsidy would like to see DOD continue selling new,

unused items for pennies on the dollar. We believe improvements

in management of the excess property system could save taxpayers

hundreds of millions of dollars annually.

Mr. Chairman, this ends my statement. Mr. Rhodes, Special

Agent Ryan, Ms. Fischer and I would be happy to answer your

questions.

[NOTE.—The GAO report entitled, ‘‘DOD Excess Property, Management Control Breakdowns Result in Substantial Waste and Inefficiency,’’ may be found in subcommittee files.]

[The prepared statement of Mr. Kutz follows:]

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Mr. SHAYS. Thank you, Mr. Kutz.

First off, how long was this investigation?

Mr. KUTZ. A little over a year.

Mr. SHAYS. And tell me, were you surprised by anything you

found, or was your opinion such that you just weren’t surprised?

Mr. KUTZ. Well, we had suspicions. In my opening statement I

had mentioned the chem-biosuits from your hearing several years

ago where they were selling them for $3 at the same time they

were buying brand new JS List suits, which are the ones that the

soldiers are using in Iraq, for example. So we had suspicions that

this could be a broader problem, and after discussing this issue

with your staff we decided it would be a good idea to take a broader look at the entire system to see how significant the waste and

efficiency could be.

Mr. SHAYS. Well, I’ll use the answer to my question by saying I

wasn’t surprised because of that, and is that your response?

Mr. KUTZ. That would be my response, yes.

Mr. SHAYS. All of the equipment that we see here, it’s your testimony it is still being used by DOD?

Mr. KUTZ. I don’t know if it still is. At the time that we ordered

it or requisitioned it, it was still in demand by the services, that

is correct.

Mr. SHAYS. Of these, which ones do you find the hardest to comprehend—well, I use the word—which ones here do you find are

the most alarming; in other words, alarming you can use in terms

of threatening national security, or just alarming because of the

magnitude of the issue? I have my own personal choice, I’m just curious what yours is.

Mr. KUTZ. I think we probably have the same one. The power

supply units for nuclear attack submarines, we’re not sure why

DOD would be letting GAO have them. We don’t have any nuclear

submarines at GAO, so there would be no reason for us to get

those. The same thing with the circuit cards that are for cryptologic

satellite communications. We have no need for that, yet we were

able to get that.

Now, whether there is any security issues——

Mr. SHAYS. When you say ‘‘we,’’ in other words, why would anyone buy it?

Mr. KUTZ. Well, we didn’t buy those. We requisitioned those as

GAO. The medical chests, the power supply unit and the circuit

cards, we requisitioned those. They knew we were GAO for those.

The rest of them we used our undercover card to buy on the Internet from the contractor, govliquidation.

Mr. SHAYS. Now why did you do the requisition? Did you try first

to see if you could buy them?

Mr. KUTZ. No. We wanted to check both parts of the system. The

way the system works is, first of all, DOD units and some other

entities get a first shot at these items, and then they go to GSA,

and governmentwide other agencies get a chance, State and local

governments, local law enforcement, and once they go through that

they go to governmentliquidation.com and can be sold on the Internet. And so we wanted to check out various stages of the process

to see what we could requisition versus what we could buy at the

end.

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Mr. SHAYS. I’ll add another one, the uniforms and the insignias

that you could buy; is that the extent of the insignias that you

could buy or do you think you could buy others as well?

Mr. KUTZ. We bought others; I mean, we didn’t have enough

room to put them on the board. We had 8,000 of them.

Mr. SHAYS. You can get 8,000?

Mr. KUTZ. Yes.

Mr. SHAYS. Not just duplicates, but other insignias as well?

Mr. KUTZ. We have some others, yes.

Mr. SHAYS. So it is possible for someone to just basically look like

a soldier or sailor, Marine.

Mr. KUTZ. Yes.

Mr. SHAYS. Just as an aside, I would imagine some of these uniforms are sold to our troops. Do they have to pay full price when

they buy them?

Ms. FISCHER. Chairman Shays, the military has a uniform allowance, so within that allowance they’re issued a number of uniforms,

shirts, trousers, jackets, camouflaged clothing as well.

Mr. SHAYS. But they’re priced at the going rate; I mean, they are

given an allowance——

Ms. FISCHER. Correct. The units will pay for them, yes.

Mr. RYAN. I just want to add, if a soldier goes online he can buy

that uniform. So the difference here is the government liquidators

is selling large quantities, where you have your e-Bay, which is

selling more one or twosies. So in this particular case, in regard to

your original question, from a national security perspective, yes,

that is a problem in my opinion, the uniform, because it can be

purchased, and someone who would like to take advantage of the

situation could manipulate the facts, put that uniform on and

cause some discomfort for other people I would believe.

Mr. SHAYS. One of the most alarming things when you’re visiting

in Iraq is the concern that someone could basically wrap themselves in so-called body armor, but it is really a plastic explosive

device, it would look identical. And the concern is that they would

walk in looking like an Iraqi soldier or an American soldier. And

what you’re saying is this is easily ordered.

Mr. RYAN. You can buy them, that’s for sure.

Mr. SHAYS. OK. Walk me through it, and then I will yield to Mr.

Waxman—we have as much time, Mr. Waxman, as you want to

have, and Mr. Duncan—walk me through the significance of the

$400 million. It seems like a lot of money.

Mr. KUTZ. What we did to get the $400 million is these were

exact matches of items that were being purchased that were available in new or unused condition or excellent condition in the excess

property system for 2002 and 2003. So we did exact matches of

what is called national stock numbers. So to the extent that the

data was reliable in the system, which is an issue I mentioned in

my opening statement, much of the data is not reliable. We had

exact matches of items being bought in the same fiscal year that

were available in the excess property system in new condition in

the same fiscal year.

Mr. SHAYS. And this is equipment supplies worth $400 million

that was excess—viewed as excess, and yet was being continually

purchased by DOD?

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Mr. KUTZ. When I say excess, it went outside of the DOD system.

It was not reutilized within DOD. It was either sold on the Internet, given away or destroyed.

Mr. SHAYS. So—but at the same time they were buying that very

same equipment?

Mr. KUTZ. Correct, the identical items. It had to be an identical

match to be part of the $400 million.

Mr. SHAYS. Just so I know, before I yield to Mr. Waxman—not

yield, give him his time—Mr. Rhodes, tell me each of your roles in

this so we understand a little bit of your expertise here. Did you

each have different assignments?

Mr. RHODES. My assignment was to review some of the technical

equipment to make certain, one, that it had not been used; two,

that it was actually what it was described to be; and three, that

there was some value to the equipment. For example, let’s go to

your original point about the power supplies. Just on the facts,

item No. 1, it is true, GAO does not have a nuclear attack submarine. Second point is that this is still to this day labeled a critical shortage item by the U.S. Navy relative to the Seawolf attack

submarine.

Mr. SHAYS. It’s labeled as—say that again.

Mr. RHODES. It’s a critical shortage item.

Mr. SHAYS. That was put as excess property.

Mr. RHODES. Yes. And third part is it had never been used, it

had never even been screwed into something. So power supply in

the possession of the Government Accountability Office and, one,

we have no reason to have it and, two, it’s a critical shortage item.

Relative to the cryptographic gear, they had not been used, they

had not even been plugged in because there was no wear on the

pins where they’re supposed to meet with the satellite calling system. There is no cryptographic keys inside of it, but you can understand the frequency that it runs at and things like that, the kinds

of power that they’re going to use. The other part is that is an NSA

controlled item. The U.S. military is supposed to respond back to

the NSA and not destroy it. They’re supposed to go back to the National Security Agency about the cryptogear as part of the Uniform

Cryptographic Architecture and say this is——

Mr. SHAYS. So your point is it’s one thing to have certain things

that are dangerous and being shared, it’s another thing to say it’s

excess and we no longer need it. But what you’re saying is there

is actually a specific requirement that be returned.

Mr. RHODES. Yes, sir.

Mr. SHAYS. Tell me your focus, Ms. Fischer.

Ms. FISCHER. Chairman Shays, I was responsible for leading the

audit portion of our work. That included the assessment of the data

in the purchasing system and the excess inventory system and

leading the work to test the inventory accuracy at five DMOs and

five DLA supply depots.

Mr. SHAYS. Mr. Ryan.

Mr. RYAN. My job here was to help coordinate audit investigations, to identify items that we should purchase, to do investigations on seeing how they were excessed, why they were excessed,

who purchased them, what happened to those items afterward. We

had three agents, Agent Rodriguez, Agent Newbolt and Agent

50

Brown, traveling around the country doing interviews with the people who were excessing them and the people who were buying them

at the same time.

We provided support in using our undercover capability to make

the purchases through the governmentliquidation.com. And we also

worked with Ms. Fischer’s team to do some testing on shipments

that were short of numbers, quantities, and track them through the

system to see if anywhere along the way the DOD would have

made some type of adjustments for missing items that were not

part of original shipments.

Mr. SHAYS. When I was in the Peace Corps, I was in Molokai,

and I was invited to spend Christmas at a friend that I had met.

His wife was an unbelievable cook, but at any rate he showed me—

and I’m going back 30 years ago, and he showed me his freezer.

And if you lifted up his freezer, it all said U.S. Government, and

it appeared to me to be products that really were part of our military that were somehow in his possession. He wasn’t showing me

to boast about U.S. Government, he was just showing me that they

had a lot of different food and they ate well.

Mr. Waxman.

Mr. WAXMAN. Thank you, Mr. Chairman. I want to thank each

of you for the work you have done. This is really breathtaking to

imagine that the equipment that I presume still can be used by our

own military is being bought for pennies on the dollar, and if

they’re not being used by the military and they’re being bought for

pennies on the dollar, we’re shortchanging the dollars we should be

getting so that we can use it for the needs of our military in Iraq.

Let me just verify. Are we talking about equipment that could be

used right now by military people, our military people in Iraq?

Mr. KUTZ. Yes.

Mr. WAXMAN. Give me a quick few examples of that.

Mr. KUTZ. Oh, I would say probably several of these things; certainly the medical supplies could be, the gas burner units possibly,

the suction apparatus, and I guess the insignias and the uniforms

possibly. So a number of these things could be.

Mr. WAXMAN. So they could be used by our military in Iraq, and

you have also testified that they could be used by our enemies in

Iraq if they are purchased by just going on the Web and getting

a bunch of uniforms to appear like they’re American soldiers. Is

that something we need to be worried about, Mr. Ryan?

Mr. RYAN. I think that is a concern. I think the DOD should take

a serious look at what they’re excessing in regards to uniforms and

insignias, determine if that uniform is still being used by our soldiers today, why are we getting rid of it. If it is so blatant that the

uniform can be recognized by the humans in charge of security that

it is not a current uniform, then I think they ought to excess it.

But I think a lot of consideration should be given to—DOD should

give a lot of consideration to what they’re doing with the disposal

of these uniforms, yes.

Mr. WAXMAN. There are two agencies at the Department of Defense who are involved; is that correct, Mr. Kutz?

Mr. KUTZ. There is the Defense Logistics Agency and the Defense

Reutilization Marketing Service, which is under DLA’s control basically.

51

Mr. WAXMAN. And what are they supposed to be doing; are they

supposed to be getting rid of stuff we can no longer use and selling

it for the most money that can make?

Mr. KUTZ. Well, DLA is in charge of buying the new items and

supplying the troops; they do a lot of the logistic support for our

military forces. The excess property system has many functions,

one of them being to reutilize new and usable items like the ones

we see here today. They also do things such as demilitarizing or

destroying items that could be used, should not be having technology transferred outside of DOD. So certain things now like the

chem-bio suits that we testified on before are now typically destroyed if they are, rather than sold to the public, which is a result

of this subcommittee’s prior hearings, a positive result of them.

Mr. WAXMAN. Ms. Fischer, let me ask you this question, because

I think it fits in with what you said was your focus. How is it that

an ordinary retail establishment or grocery store in this computer

age can keep track of their inventory, but it doesn’t appear that our

Defense Department can do the same?

Ms. FISCHER. That’s a good question, Congressman Waxman, and

you’re absolutely right. But DOD has systems that are not integrated, it doesn’t know where its various pieces of property are at

any given time, and the systems don’t give adequate visibility over

those items for reutilization.

Mr. KUTZ. And Congressman, I’m going to be testifying tomorrow

on that very topic before Chairman Platts and Representative

Towns. DOD had reported over 400 duplicative stovepipe business

systems, and of those, 2000 of them, they report are logistic systems. So you can imagine 2000 systems out there that do logistics.

It’s a very, very difficult situation for the Department to be effective with supply chain management with that kind of technology

environment.

Mr. WAXMAN. Have you given thoughts for recommendation of

what we ought to do in Congress?

Mr. KUTZ. With respect to systems modernization?

Mr. WAXMAN. Yes. These agencies are part of the Defense Department, we fund the Defense Department, we expect them to be

using this property in a reasonable way, they use some common

sense, if nothing else, but at least they have their systems in place.

What do we need to do, scrap the system and recreate it, or is it

fixable?

Mr. KUTZ. I think you need to do what you’re doing today. You

need to have hearings like this, and when issues like this are out

there you need to have oversight hearings, you need to stick with

these issues and hold DOD accountable. It’s really a management

issue. It’s not really—I don’t think there is any legislation that’s

not in place right now that will prevent them from being successful

here. It’s really a matter of leadership and management.

Mr. WAXMAN. So if Congress does its oversight job, it keeps them

honest?

Mr. KUTZ. I think that’s the right thing for you to be doing.

Mr. WAXMAN. And if we didn’t do our oversight job, isn’t there

somebody in the administration that’s supposed to be watching

what goes on in the Defense Department?

52

Mr. KUTZ. Well, certainly the management within the Department of Defense is responsible, and I guess OMB also has some

oversight over some of the systems issues governmentwide, whether they’re e-gov initiatives and other types of oversight efforts. So

there are other people responsible.

Mr. WAXMAN. How easy are we talking about the purchase of

these items? You’ve mentioned a Web site, it sounds like a government e-Bay service where you can go on there and pick and choose

medals, uniforms. Can you get rocket launchers, Mr. Rhodes? What

is the most serious thing——

Mr. RHODES. We were not able to procure rocket launchers.

Mr. WAXMAN. What is the most serious thing that you were able

to procure that could really endanger our security?

Mr. RHODES. From my technical perspective, it’s difficult to say.

I mean, I look at a tent and I see a soldier that’s getting wet. I

look at that medical equipment and I see a soldier that’s bleeding.

I look at that gasoline burner and I see a soldier that’s cold. I look

at those boots, and that’s a soldier who’s barefoot. I look at that

suction apparatus, and there’s a soldier with a chest wound from

an improvised explosive device on the road into downtown Baghdad.

So, I mean, all of these have their own weight and they have

their own measure. I can’t pick any one of them and say it’s the

most catastrophic.

Mr. WAXMAN. Well, let me ask Mr. Ryan, because I heard something about an investigation of missing warheads. Do you know

anything about that? Or circuit cards, what would those be used

for? Do you have something—some information on——

Mr. RYAN. Well, I defer to Mr. Rhodes in regards to identifying

the specific purposes of the items. We were given the leads and we

followed the investigation that we were told to do. So I will defer

to him in relationship to the degree of importance or——

Mr. RHODES. The relative importance of a warhead. The argument is made that they were inert; however, the warheads were

sitting on the back of a flatbed truck and were not protected nor

covered. If warheads are missing, even if they’re inert and you cut

them open, then you can find out how they work. Inert just means

they don’t have explosive in them; it doesn’t mean that you don’t

understand the shape of the charge, it doesn’t mean you don’t understand how they fragment, it doesn’t mean you don’t know how

they fuse and arm.

Mr. WAXMAN. Could somebody get a missile warhead that is

inert through any of these systems of procurement?

Mr. RYAN. I think in that particular case, if it’s not coded correctly when it’s going into the disposal system, much like these

items were, then someone could requisition it. It all depends on the

coding, the de-MIL coding of the power supply or the circuit card.

These are examples which we were not supposed to get, but we did.

Mr. WAXMAN. I see. So you found a lot of miscoded information

on those things?

Mr. KUTZ. Well, let’s use the example of the tent. The tent was

coded as condemned. These boots were coded as condemned, and

they’re new and unused.

53

I think what we’re talking about too, before, was items that were

lost, or losses if you will, and there were some things that were lost

that when we did our statistical sample we tried to find aircraft

parts, helicopter parts and chem-bio suits and they were gone. And

body armor also was reported as missing. And so we did report

$466 million of items that DOD themselves reported losses. But we

became concerned about that because when we did our random statistical samples, when we looked for some of these items they were

just gone and there was no explanation of where they had been.

And Special Agent Ryan is doing some followup investigations on

that, but we’re not sure we’re going to be able to come to resolution

as to what happened.

Mr. WAXMAN. Mr. Kutz, you suggested that we have congressional oversight. Do you think Congress needs to revisit the procurement laws themselves to spell out what can and cannot be contracted, either contracts, government contracts, obviously for services and we hear a lot about that, but these are government contracts for sale of items, do you think that ought to be covered by

changes in procurement law?

Mr. KUTZ. I’m not a procurement expert. I would defer that question.

Mr. WAXMAN. Well, it was really amazing that we’re seeing from

you these kinds of examples that are really horrifying when we

know that our troops are not fully equipped and we’re told we don’t

have the money for it. We know we have these huge budget deficits

in this country, and yet we’re finding our own Defense Department

so wasteful in the management, maybe not intentionally, but

wasteful nevertheless, of the costs and equipment and the use of

items that we’ve purchased to make our country stronger. And

their inefficiency I think is making our country weaker and our

country also poorer as a result.

Thank you very much.

Mr. SHAYS. I thank the gentleman.

Before going to Mr. Duncan, I just want to have you clarify a little bit. There is so much that we could be talking about we could

keep you here a long time. And I’m going to make an assumption

that some of what you are doing is triggering additional investigations; is that correct, Mr.——

Mr. KUTZ. That’s correct. We are looking at some of the lost and

potentially stolen items.

Mr. SHAYS. And so just explain to me—and you said in excess

property loss, in other words, it’s literally property that should

have been there that isn’t?

Mr. KUTZ. Correct.

Mr. SHAYS. And when you talk about the property loss of $466

million, that is what you discovered or what DOD acknowledges?

Mr. KUTZ. No. That’s what they reported. When we became concerned about it was when we were doing random statistical samples at 10 of the locations, and some of the lots we went to observe

basically were gone, complete lots were gone.

Mr. SHAYS. Was that an infrequent occurrence? Was most of the

time it there?

Mr. KUTZ. Most of the time things were there, but certainly it

was enough for us to be concerned. I mentioned aircraft parts,

54

chem-biosuits, helicopter parts, some of the things were not just

concerns because of the frequency but for the types of things that

were missing.

Mr. SHAYS. But they acknowledged $466 million unaccounted for.

Mr. KUTZ. Correct. And again, whether they’re recordkeeping

issues or stolen or lost, nobody knows for sure.

Mr. SHAYS. And we don’t even know how accurate that number

is?

Mr. KUTZ. Correct. That could be understated, overstated.

Ms. FISCHER. Because in the sample we had at the Columbus

DRMO there were 23 examples of either entire turn-ins that were

missing or quantities of other turn-ins that were missing, and they

only recorded losses for two of those. They never recorded the

losses we identified in our test work.

Mr. SHAYS. So what you’re telling us is, when you asked DOD

their losses, they said $466 million, which is a very high number,

I mean it really is. I mean, it’s not $466,000, it’s not $4.6 million,

it’s not $46 million, it’s $466 million. You’re saying that you encountered—a majority of those losses that they couldn’t account for

were not being stated as losses?

Ms. FISCHER. Correct. And that includes those 72 chem suits at

the Columbus DRMO that weren’t there when we did our testing.

Mr. SHAYS. So when you identified losses just randomly, most of

the time they weren’t included as losses by DOD?

Ms. FISCHER. At the Columbus DRMO that is correct. We don’t

know across DOD because we didn’t test every warehouse.

Mr. SHAYS. I understand. Thank you.

Mr. Duncan, you have the floor for 10 minutes.

Mr. DUNCAN. Thank you, Mr. Chairman. I will be very brief. I’ve

got some constituents waiting on me. But Mr. Kutz, how long have

you been with the GAO?

Mr. KUTZ. A little over 13 years.

Mr. DUNCAN. Have you seen any worse examples of waste in the

time that you have been there?

Mr. KUTZ. I’ve seen a lot of examples of waste, that’s kind of

what we do. I’m in charge of our team that does forensic audits and

special investigations. And so we look at fraud, waste and abuse

across the government and there is lots of it, and DOD has its

share.

Mr. DUNCAN. Well, let me ask you this, a witness on the second

panel will try to defend this by saying that their primary focus

should not be on how much we made on the resale of these items,

the important point is getting the right items to the warfighters

when they need them while simultaneously providing optimal return on the investment of the American people. Do you regard

what you found as providing optimal return on the investment of

the American people?

Mr. KUTZ. No. The $400 million I mentioned would be a waste

of taxpayer money directly related to the excess property system.

The other part of the $31⁄2 billion of waste that we talked about is

not the fault of the excess property system; it is back to the logistics overbuys that are a chronic DOD problem, where they just buy

more than they need. And by the time it makes it to the excess

property system, you could have a 5 or 10-year-old computer that’s

55

really not worth much by that time. It’s still brand new in the box,

but after 5 years that computer is not worth a whole lot of money.

Mr. DUNCAN. Well, I think most people, if they heard you were

buying boots for less than $12 a pair on an advertisement in which

you thought you ordered 30 boots and you ended up with 42, 37

of which were brand new, never used before, and you bought them

for less than $12 at the same time the Pentagon was ordering

what, 21,000 new pairs at $135 a pair?

Mr. KUTZ. Correct.

Mr. DUNCAN. Something like that. I mean, if I told that to people

in my district they would think it’s terrible.

Mr. KUTZ. I wish I could tell you that I was shocked but I’m just

not because I have seen this kind of thing across the government.

Mr. DUNCAN. Well, I can tell you this, most of these examples

that you’ve given here today would shock most of the people in my

district, I can tell you that. They may not be a shock to you because you have seen so much of it over the years. I mean, when

you’re talking about buying these half tents, you know, and these—

all these other things that just—sometimes pennies on the dollar.

In fact the boots, I saw someplace where the boots were later sold

to a trade company for 40 cents on the dollar.

Mr. KUTZ. Right. 172 pair of these extreme cold weather boots

were sold to the Robinson Trading Co. They sold them to a place

called Mad Dog Wholesalers in California for $5 a pair. Mad Dog

sold them to other entities, excess property entities for $30 a pair,

and the trail ended there, we didn’t follow it any further, but in

all likelihood they retailed them for something greater than $50.

And that’s an example where everybody made out but the American taxpayer.

Mr. DUNCAN. Well, all I can say is, I mean, when I read all this

about these chemical—this was from the earlier hearing, the chemical suits that you bought for $5 were, these items had an original

DOD acquisition cost of $55,817 and GAO paid only $5 shipping

cost to obtain all of them; I mean, this is just ridiculous. And in

fact, I think that anybody who didn’t work for the Federal Government would be embarrassed and ashamed to come up here and try

to defend something like this like the witnesses on the next panel

are apparently going to try to do.

Thank you, Mr. Chairman.

Mr. SHAYS. I thank the gentleman.

Mr. Dent, do you have any questions?

Mr. DENT. No questions.

Mr. SHAYS. What I would like to do is have our counsel ask a

few questions before we get on to our next panel, and I may have

a few more.

Mr. HALLORAN. Thank you. In the course of this work did you

discern followup or implementation from your previous work in this

realm? Did you see a risk assessment process for biological lab

equipment?

Mr. RHODES. There is a risk process that is labeled interim. It

is not, we aren’t seeing anything finished in it. There was an interim process for it. It does not include coordination, as our recommendation made, with the scientific community inside or outside

56

of DOD. Therefore, we have some pretty strong reservations and

some strong concerns about the veracity of the risk assessment.

For example, some of the equipment that we were able to get

was just being held. That’s the entire risk plan was just to hold on

to it, once it comes in to park it and leave it.

Mr. HALLORAN. To what extent would the success of even that

interim proposal rely on data feeding it?

Mr. RHODES. Well, it wouldn’t in this place because, one, it’s the

interim risk assessment, and the other is it didn’t actually take in

the veracity of the scientific community that we recommended,

both inside and outside of DOD.

Mr. HALLORAN. Mr. Rhodes, would you characterize the DOD response to the report? The DOD has seen this and had time to react

to it; could you characterize their response?

Mr. KUTZ. I would say it’s responsive, and that they’re taking action on all 13 of the recommendations in this report.

Mr. HALLORAN. I’m going to ask you to do a little better than

that. They’re taking actions such as they’ve said they did before.

Are they actions that are likely to yield results in the near term?

Mr. KUTZ. Well, I think there’s two things. In the short term

they can’t deal with the systems issue. In the short term they’re

going to have to improve human capital and processes. In other

words, when the excess property items come into the system people

are going to have to do a better job of validating the data. Right

now that was one of the problems we saw at some of the systems

at excess property locations, is that they were not validating data

when it came into the system.

So they can improve the human capital and the processes, but

the systems is one that is a long-term situation, and history shows

that they have not been real successful implementing new systems

that provide integrative solutions.

Mr. HALLORAN. So you’re saying that based on the quality of the

data you saw, the most critical near term thing they could do is

improve the training of the intake of those creating the data at the

start?

Mr. KUTZ. Yes. Validation of data and improvement of the quality of the data in the system is the most immediate thing they can

improve.

Mr. HALLORAN. And that’s pretty doable; it doesn’t require a

multi billion dollar computer system——

Mr. KUTZ. Correct. I mean, it doesn’t give you the integration of

the excess property system in the purchasing system, but it at least

gives you good data so you can do exact matches and determine

what’s available before you buy it.

Mr. HALLORAN. Well, speaking of integration, who wants to tell

the story of the biological safety cabinets? Because you saved the

money on this, didn’t you?

Mr. KUTZ. Mr. Rhodes can discuss that.

Mr. RHODES. There were a set of—it was a full set of six biolevel

3 safety cabinets. At an earlier hearing we came up and talked to

you about—these are safety cabinets that are one level below

biolevel 4. Biolevel 3, you can work with some extremely dangerous

pathogens. We found out that this equipment was available. And

I have a friend, a scientific friend, who is the head of the Biolife

57

Sciences Center out at Dugway Proving Ground, and I asked him

if he would like six biolevel 3 safety cabinets for just basically for

free, DOD had to pay the shipment to, and he said of course I

would because in the process—he was actually in the process of

trying to set up the procurement of three biolevel 3 safety cabinets,

and now he was going to get six for nothing, somebody else had to

pay the shipping. And this is an example of equipment that was

just being held. It had come in, had been excessed, but the

DLA——

Mr. HALLORAN. It had been miscoded, so it wasn’t even visible

to him, had he not looked in there——

Mr. RHODES. It wasn’t on the Web page, it was sitting in a Norfolk site. And so we parlayed, we did the deal, as it were, we put

the folks at DLA in touch with the folks at Norfolk. The deal was

closed, and it ended up not just being three biolevel 3 safety cabinets, but they got a whole series of absolutely pristine scientific

equipment, including some extraordinarily expensive microscopes,

as well as tools and cabinets and controls and all that.

So I guess we returned some money to the taxpayer by making

certain the deal got closed or something. But it was a matter of we

knew someone, and there was no system in place for DLA to know

the same person.

Mr. HALLORAN. Your report discusses, it seems to me, significant

extent of kind of downcoding of surplus material when it’s turned

in, and you found it, it was marked condemned and it’s good as

new. And your report refers to a broader phenomenon of

downcoding material. Why is that? Is it error, or is there some incentive to do it? Mr. Ryan mentioned this aftermarket that likes

the stuff that way. Is there some incentive to mark it as condemned and keeping it moving?

Ms. FISCHER. There is actually confusion I think on the part of

the military units about what the definition of unserviceable is. In

the interviews we did with the people that are turning in the excess equipment, they view unserviceable as meaning an item is unserviceable or unusable to them, they don’t have a need for it. So

it is unserviceable even if it’s new and unused, so they use one of

the condemned codes or codes that says it needs repair or something in the unserviceable category.

We did talk to DOD about this even a week ago, and they recognized that there is training needed to resolve this problem, and

they have started a training program.

Mr. HALLORAN. That’s training a lot of people. Who in the unit

can excess something, to declare something excess?

Ms. FISCHER. Well, the people that are using the equipment first

off. When they turn it in, they know what condition it’s in. They

know whether they have used it or not or if it needs repair. And

we saw things at the DRMO that had signs on it or tags on it that

said needs repair or broken. They can certainly identify the equipment that way.

And then the supply and logistics units that actually process the

turn-ins can observe it, look at it, test it, or ask the turn-in unit

the condition of the property. And they’re in the best position to

record the condition before they turn it into the DRMO. And then

DRMO personnel should inspect it and verify that the information

58

they’re getting is correct before they enter it in inventory. And then

you would have a good process. You can rely on the condition, the

item description, the quantity that’s advertised as available. You

wouldn’t order something and come up short later or come up with

the wrong item later.

Mr. RYAN. I might add, also, that there is some success in coding

also. I will give you an example. Up at NSA they disposed of several hundred computers because they changed systems. These computers were brand new, in a box, hadn’t been used, but they were

there for a year or two because of the systems change. The individual there responsible for property decided they were no longer serviceable, so they sent them to DRMO. Well, when DRMO saw them,

they saw they were brand new in a box, and quite honestly those

computers were a lot better than what other Federal agencies had

or were using right now, so they upcode. They change the code to

make it a very good product. Well, because we have special programs in this process, they’re constantly hawking the Web site to

see what items are coming up for new.

Mr. SHAYS. Who is ‘‘they?’’

Mr. RYAN. I’ll give you an example——

Mr. SHAYS. I don’t understand who ‘‘they’’ is.

Mr. RYAN. It’s the Law Enforcement Sharing Organization

[LESO]. They basically saw these computers, and they went ahead

and requisitioned them, all of them, as soon as they became available. And they came and got them. And what we did is we followed

up on those computers and we found out that they were

warehousing these computers and did not distribute them.

So they took them out of the hands of people that could actually

use them. They were warehousing them for the future. So what it

is——

Mr. SHAYS. Let me understand. They are warehousing technology

that can be dated every moment for the future?

Mr. RYAN. Well, what the law enforcement did is they took them

for the whole State of Kentucky. And in this particular case, they

put them there until people needed them. And then they distributed them as they needed them. So it was a success in regards to

realization if the special programs are to get the DOD property.

Mr. HALLORAN. Finally, the testimony on the next panel is going

to suggest that the waste in the system is somewhat marginal or

within an almost inevitable boundary because of the size and scope

of the DOD acquisition and operation. Do you concur with that?

Mr. KUTZ. If you talk about the lost and stolen, we wouldn’t concur otherwise. There is simply shrinkage in a retail entity, but isn’t

a retail entity. This is a warehousing entity. And I believe if they

had integrated systems, that they could eliminate several hundred

million dollars of this waste.

With respect to the lost property, if that is what they’re talking

about, we probably wouldn’t agree with that. We are not talking

about Charmin and toothpaste here. You’re talking about things

like body armor and chem-bio suits that are missing. So that is not

a relevant apples and apples comparison.

Mr. RYAN. I might add, too, that I’m not sure that the numbers—

the numbers are understated. I think that there is more missing

than what is reported because just in—we had a hard time initiatVerDate 11-MAY-2000 10:38 Aug 26, 2005 Jkt 000000 PO 00000 Frm 00062 Fmt 6633 Sfmt 6633 D:\DOCS\22905.TXT HGOVREF1 PsN: HGOVREF1
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ing investigations. Because we didn’t know what number to start

with, when we tried to validate what the generator was putting in

a box, we couldn’t do it. The numbers didn’t follow through. Using

the example with Ms. Fischer that we used in Ohio, there were numerous shipments that were missing items.

The generator put down 100, but when we counted the box when

it was received, there might have only been 80. But they passed

it through. They don’t count numbers. It is a pass-through system.

So they don’t spend time counting.

So you can’t tell really how much is missing, how much has been

stolen. It is just, it is very hard to do from an investigator’s point

of view because you have no starting point. You need a starting

point, and we didn’t have one.

Mr. KUTZ. And back to the $400 million, too, again, if you consider the fact that the boots and tents were in the system as condemned, we didn’t count those in the $400 million because those

showed up as items that were unserviceable.

We only counted items toward that were exact matches that were

shown in the system to be new and unused or in excellent condition. So that number is probably larger.

Mr. RHODES. I just wanted to make one point about the difficulty

in the numbers in those systems. Mr. Kutz and I have testified on

several occasions about problems in the systems. If we go to our

example of the dummy warheads, that is a hard example where we

couldn’t figure out what the number is. So we don’t know if any

were missing or not. Because the driver had one number; the deliverer had another number; the people who originated it had another

number.

The point I would make is that, yes, if somebody wants to say

there is something on the margins, fine, they can go ahead and say

that. But when you’re talking about inert warheads, I don’t know

that anybody in the private sector sells inert warheads. Likewise

with the power supply. I don’t know that there is—we aren’t talking about the margins there. We’re talking about a critical shortage

item. Also, I would make the point that, the fact that we were able

to get that power supply is listed as a successful reutilization.

So the fact that the Government Accountability Office, that has

no Sea Wolf nuclear attack submarine, got the power supply for the

electronic warfare system for that very same submarine as a critical shortage item is now listed as a successful reutilization.

Mr. SHAYS. As I listen to this, I think that we don’t have to make

it sound worse than it is. Because it is really bad.

And I’m also thinking that I can’t imagine anyone in DOD wanting it to work this way. So I’m now trying to struggle with why it’s

happening.

And I’m trying to think of what I would do if you asked me to

be put in charge of this program. I mean, is it almost without certain resources and support, is it almost in your judgment—Mr.

Kutz, if you were asked to be put in this program, how long do you

think it would take for you to straighten it out.

And I don’t mean it in an arrogant way. In other words, if you

used the best of your skills and so on, if you were coming, we said

OK, you are going to be in charge of this program, and I say, OK,

you’re in charge, and you have this amount of time to do it, and,

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then heads roll if you don’t, what amount of time should I give you

to straighten out this problem?

Mr. KUTZ. Well certainly accountability is an issue, and I think

there is a lot of turnover in the leadership of some of these areas

like the DRMOs, so turnover would be an issue. I don’t know if I’m

the right person. I don’t know if I could ever fix it any better than

anybody else. DOD has some of the best people in world. And I’m

no better or worse necessarily than any of those people. So I think

it is a difficult system.

Mr. SHAYS. Let me ask you in this way, we have extraordinarily

capable people in DOD, but we do have Government limits in what

they can be paid.

Mr. KUTZ. That is true.

Mr. SHAYS. My understanding is that the $18 billion figure that

is over a 2-year period is excess goods, excess material, correct?

Mr. KUTZ. Correct. That is the original acquisition cost for items.

So they could be 5, 10-year-old items, but that is what they originally cost.

Mr. SHAYS. So they originally cost $18 billion, and so some of

them might have been used?

Mr. KUTZ. Absolutely. Most of the items are, as I mentioned in

my opening statement, used items, in need of repair or kind of junk

basically. The $4 billion we’re talking about is some of the nuggets

going through the system of brand new items or new unused items.

So this is the minority of the stuff.

Mr. SHAYS. Let’s focus on this, on the $4 billion. And I hear, you

know, some of my colleagues who rail against contracting, and Lord

knows we need to do good supervision of contracting. But if you

could get a contractor and you paid them $10 million, but he solved

the problem with an organization of people, it would be money well

spent. We don’t have that capability. So we are limited, it seems

to me. Correct me if I’m wrong. Are we able to go outside DOD and

contract this all out potentially?

Mr. KUTZ. Yes, I mean, we do contract things out, if you look at

the other hearings we have had with you on business systems modernization, and I’ll say DOD right now is spending $13 billion a

year on its business systems or $35 million a day for the 4,100

stovepipe duplicative systems they have, that is not a very good return on investment for taxpayers. And I would say a vast majority

of that money is probably going to private-sector contractors who

are not able to or have not been able to solve DOD’s problems. So

I think some of the best minds in the world are working on this,

and it really has been a very tough thing to resolve.

Mr. SHAYS. So then let me, you had pages and pages of recommendations. List to me what you think are the most important

recommendations.

Mr. KUTZ. Well, I’ll give you mine, and I’ll let the other folks

here chime in, but I would say the issue related to validation of

data would be No. 1 where items that are turned in are correctly

recorded, because if you don’t record them correctly at the very

start of the process, often times we see that they go through the

entire process in error.

So for example, these boots or the tents that were coded as condemned, someone should have caught that along the process.

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Mr. SHAYS. When we code them, do we have the name and the

number, or do we just have a number?

Mr. KATZ. It would be the national stock number which is a

unique identifier for these items, a description of the items, the

quantity, the condition code, all that.

Mr. SHAYS. So someone should be able to look at it and say, you

know, these sure as hell aren’t boots.

Mr. KUTZ. Correct. And they’re not doing that. That is the policy.

The policy is, when items are turned in, they are supposed to be

validated for the most part, and we found that was one of the biggest issues that wasn’t happening.

Mr. SHAYS. So validation of data is one. What is another one?

Mr. KUTZ. I’ll use one more and let the other folks talk. The longterm integration of the purchasing system and the excess property

system where, if someone is going to buy the new boots, the system

does not let them buy the new boots because it tells them that we

already have boots in the warehouse. To me, the integration of systems like that would be a major improvement of what they have

and could really eliminate a lot of the waste I’m talking about.

Mr. SHAYS. I’m not sure I fully grasp what you’re saying, so say

it over again.

Mr. KUTZ. Let’s say you have an acquisition system that tells me

that the military units need 10,000 of these boots. When I go to

buy those 10,000 boots, the system doesn’t tell me that there is

2,000 boots in the excess property warehouse. So I go buy 10,000,

but I already had 2,000. If I had known there were 2,000, I would

have only had to have bought 8,000.

Mr. SHAYS. And you would have had the others right away?

Mr KUTZ. I would have had the others right away. They were already in the DOD warehouse.

Mr. SHAYS. I’ll take some other recommendations that you would

want?

Mr. RYAN. I think the two that I have are very similar to Greg’s.

I think there has to be some type of accountability. Someone has

to be held responsible in the beginning of this process when you’re

entering the excess property stage. You have to be able to verify

numbers and the conditions.

My second recommendation is to have a complete modernization

of this coding system, make it more user-friendly so that people understand it. Just because NSA can’t use that computer, they

shouldn’t declare it unserviceable. Because when people go into the

system and they see an unserviceable computer, they’re going to

back away from it because they don’t want to get stuck with scrap.

So I think it is incumbent upon DOD to do a better job of modernizing the coding system and the situations in which they’re

going to advertise this equipment.

They’re my two.

Ms. FISCHER. I agree 100 percent with the concern over data reliability and the first step being to get accurate data in the system

because that would impair the reutilization process from the very

beginning.

In addition, I have a concern about an interim solution. The integrated systems effort is targeted for completion in July 2009 if it

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doesn’t slip from that. So there is another 4 years or so that we

could be wasting a couple hundred million dollars a year.

And something as simple as coming up with a way to list NSNs

that are being purchased as well as NSNs that are flowing into the

excess property process and being able to match those up——

Mr. SHAYS. And NSNs are national stock numbers?

Ms. FISCHER. National stock numbers. Yes. They identify like

items, you know, standard-use items so you know what it is.

I am concerned, that they need to come up with a workable interim process for matching that up so that DRMOs, when they get

something in a condition, know if that is still being purchased during that fiscal year. And they can let the DLA supply center know

they have those items so they don’t turn around and purchase the

same items.

Mr. RHODES. My No. 1 concern, of course, would be the data reliability because all of these things are supposed to be junk. We

bought junk. Well, it is not junk. It is all good.

Mr. SHAYS. I want to clarify. When you say all of them should

be junked, no, you have certain excess material that is excess. It

is not necessarily junk. Are you saying all of these you bought were

told were junk, were labeled as junk.

Mr. RHODES. Right. Yes, this was all garbage.

Mr. SHAYS. Define junk and garbage to me. I’m sorry.

Mr. RHODES. It is considered unserviceable. It is considered——

Mr. KUTZ. In the system, it is recorded as unserviceable.

Mr. SHAYS. Every one of these items?

Mr. RHODES. Every one of these items: Those sterilized medical

supplies in packages that have never been opened, those circuit

cards that were in sealed containers, that power supply that was

sealed up, that suction apparatus if we break the seal on the pad,

it will no longer be sterile. But right now, it is considered sterile

until you break the seal. All this, these unused boots, this unused

gas can.

Mr. SHAYS. Well then how would they have—never mind.

Mr. RHODES. The point that I would add in to the data reliability, which is actually a function of the other recommendations had

that have been made, goes back to earlier recommendations that

we have made about understanding the value of the equipment.

And I don’t mean dollars and cents. I’m talking about, what does

this mean? Who can use this?

Part of that is tied into, somebody’s already buying it. But I

can’t, I can’t understand how I in the GAO am able to buy a critical

shortage item, even if it is labeled as junk.

How do I get a critical shortage item, one that I can’t use? And

the other is, it is a critical shortage item that someone else can use.

Mr. SHAYS. Well, having been a Member of Congress for 18 years

and doing oversight for as long as I have, and as I get older, I get

a little more impatient.

If you were making a recommendation to the panel that followed

to be a part of a story of success given what you think are the most

important issues, what would be your advice? And then we will go

to the next panel.

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Mr. Kutz leaned to you, Mr. Ryan, because he doesn’t know what

he was going to say. You’re allowed to laugh, Mr. Kutz. That was

my best attempt to be funny today.

Mr. Ryan.

Mr. RYAN. For the next panel that follows, I’m not really sure

what you say to them. I think they’re in a culture that needs to

be changed. I think they’re fighting an uphill battle with trying to

live in today’s modern economic world. They’re also in an area

where we as society trust people to do the right thing.

Some people have a tendency to take advantage of that trust.

From my perspective, from the law enforcement perspective, that

is what I’m looking at. I’m looking at, how does someone compromise a system to get ahead? And because there are so many

people involved in the process and the trust factor from point A to

point B to point C must be there, that is something that they have

to live with at that level.

So I don’t know what this panel can do at that beginning level

to make this happen except have more accountability maybe for

their managers. And that would be the point that I have to them.

Mr. SHAYS. OK, thank you.

Mr. Kutz.

Mr. KUTZ. I would say again hearings like this are very good to

hold people accountable. It helps sharpen their focus on what needs

to be done to fix problems, and they have to study up to be ready

to face questions and be prepared to answer them. And these are

tough questions. And they are going to be difficult to answer. But

as I’ve said, DOD has some of the very best people I have dealt

with in the Federal Government. And I know they have tried their

best, and they do many things well at DOD. And it’s always been

a very ironic situation or difficult situation to understand how we

can have cruise missiles that can strike within a certain distance

in Baghdad, and we can’t deal with some of these business systems. It is just very hard. We have talked about this before, how

hard it is to understand how you can have that dichotomy.

Mr. SHAYS. Fair enough.

Ms. Fischer.

Ms. FISCHER. Of course, I agree with what has been said. I think

the issue, as they move forward, because they agree with our recommendations—they recognize their process, improvements needed

and systems improvements and human capital issues to deal with.

But I think as they move forward, oversight and accountability is

key to keep moving in the direction they need to move to solve this

problem.

Mr. SHAYS. Thank you.

Mr. RHODES. I would say, build the hard linkage between the acquisition system and the excess property system so that you don’t—

each one locks the other one out relative to an item. Obviously,

that requires the data reliability and the internal controls to be

very strong. But until and unless they get to the point where I

can’t buy a gasoline burner unit because there is one sitting over

in the warehouse or I can’t buy all these boots, because they’re sitting in the warehouse—I mean, if you were Wal-Mart, Wal-Mart

doesn’t do that.

So it is not impossible.

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RiteAid doesn’t do it. All these places don’t buy stuff they don’t

need, because they already have it. So, OK, there is a margin. We

all understand that. But there is no lockout system currently.

There is no tie between acquisition and excess.

Mr. SHAYS. Thank you. Is there any question that we should

have asked that we didn’t ask that you want to put on the record?

And that is a serious question.

Is there something that you thought of and if there is a question

that you wanted me to ask, so you don’t have to volunteer it, because you want to say you were asked it, just assume I asked it.

Mr. KUTZ. I want to followup on the last hearing you had on the

biological equipment and the chem-bio suits. We did not see anything of those going out the door since your last hearing. So that

was a very positive from the hearing you had a little over a year

ago.

Mr. SHAYS. Thank you all. You have done a yeoman’s work, and

I know that you appreciate the cooperation you got from DOD. And

I know that they appreciate your giving concrete recommendations

besides just exposing what is not working.

So thank you for your service. And we will get to our next panel.

Let me welcome Alan F. Estevez, Assistant Deputy Under Secretary of Defense, Supply Chain Integration, Department of Defense; Major General Daniel Mongeon.

Am I saying that correctly, sir?

General MONGEON. Mongeon, sir.

Mr. SHAYS. Pardon me, Mongeon. I’m sorry.

And Colonel Patrick E. O’Donnell, Commander, Defense Reutilization and Marketing Service.

Thank you very much.

If you would raise your right hands.

[Witnesses sworn.]

Mr. SHAYS. Let me say from the outset that I know that all of

you are very capable, and very dedicated, and we are blessed to

have your service to our country. And I think you’re in charge of

something that is a mammoth undertaking.

I will just, before you make your testimony, say, in asking a

question of our previous panel, what they would recommend and

the challenges, I think there is a culture, I accept in a very strong

way that there is a culture in government that requires you to be

a good team player. And sometimes, being a good team player, in

my judgment, impels people who testify before a committee to understate the task, to not want to blame someone else, to take the

hit, be a good soldier. And I think that sometimes impedes our capability to get this done.

And so what I request is really a candid conversation about the

tasks that you’re encountering, the challenges you face, the lack of

resources that you may have in some cases, the mistakes that were

made, that have been made, whether by you or people before you.

Not with the intention of throwing stones, but just to help us

know how we can break through this thing, because it is, it is very

serious. I would like to know where you think the progress is, but

I’ll be very up front with you in saying that I don’t see the

progress. I think this is a record that is just going around saying

the same thing.

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That is the way I feel. And I do appreciate each and every one

of you. And I know that you are doing a job I wouldn’t want to do

because I don’t think I could do it.

So, why don’t we start.

General—Mr. Estevez, am I saying your name correctly?

Mr. ESTEVEZ. Estevez, yes, sir.

Mr. SHAYS. Let me just say, and I will throw stones at someone

else. I always ask my staff how to pronounce names. And the last

two hearings, they’ve gotten one name wrong each time. And

they’ve had me practice the wrong way to say it. So I no longer ask

them with much faith.

STATEMENTS OF ALAN F. ESTEVEZ, ASSISTANT DEPUTY

UNDER SECRETARY OF DEFENSE (SUPPLY CHAIN INTEGRATION), DEPARTMENT OF DEFENSE; MAJOR GENERAL DANIEL MONGEON, DIRECTOR FOR LOGISTICS OPERATIONS, DEFENSE LOGISTICS AGENCY; AND COLONEL PATRICK E.

O’DONNELL, COMMANDER, DEFENSE REUTILIZATION AND

MARKETING SERVICE, DEPARTMENT OF DEFENSE

STATEMENT OF ALAN F. ESTEVEZ

Mr. ESTEVEZ. Thank you, Chairman Shays. And thank you for

the opportunity to appear before you to discuss the Department’s

excess property systems.

I’m grateful for the opportunity to provide the Department’s

views of the Government Accountability draft report, DOD Excess

Property: Management Control Breakdowns Result in Substantial

Waste and Inefficiency.

Mr. SHAYS. I’m going to ask you to move the mic a little closer.

Mr. ESTEVEZ. Yes, sir. My written statement, which I provided

for the record, captures the number of the solutions we were implementing to improve the return supply chain as it applies to reutilization and disposal.

Before I summarize a few key efforts that we have underway, I

wish to commend the Government Accountability Office and specifically the audit team for the positive recommendations contained in

the report. The Department is working to make those improvements in our excess property operations a reality.

However, we are confident that our published policies regarding

the Defense Reutilization and Marketing System across the system

are sound. DOD policy states that material available in the disposition system will be used to the extent feasible to prevent buying

and disposing of the same material simultaneously. While the return supply chain is the subject of this hearing, the return process

is only a part of the supply chains that operate in the Department

of Defense. The return process must be examined in the context of

these DOD supply chain processes.

Today, the Department’s energies are focused on the front end of

the supply chain where we have the greatest impact in supporting

our forces. That is getting the warfighter what he or she needs as

quickly as possible. Making sure that the right item is available

causes us to stock inventory and safety stock worldwide, such as

parts for airplanes that first flew in the 1950’s, to leading-edge

electronics and medical devices.

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I would like to highlight some of our successes in balancing support for the warfighter with efficient management of our resources

over the last 3 years. We are supporting a deployed weapon systems quickly and effectively achieving 30 to 40 percent increases in

material availability, a 70 to 80 percent reduction in lead times,

and historically high levels of readiness for systems deployed in

Iraq today, mostly through the use of performance-based logistics

contracts.

Material availability has increased for those items which the Department manages across the key supply chains that support weapon systems, commodity items and our deployed forces.

Today, material availability for the Defense Logistics Agency is

88 percent, versus a target of 85 percent, and backorders has hit

a historic low in March 2004.

Through aggressive partnering with industry, DLA’s cost recovery rate, as seen on the chart on the right, entitled DOD-DLA Cost

Recovery Rates, are declining and are projected to continue this

downward trend.

Our inventory has decreased from a high of over $100 billion in the 1990’s to slightly over $70 billion today, even with increased

operations. The bottom line, we are improving all aspects of our inventory management process. The impact can be seen in the increasing levels of support provided to the warfighter. For example,

I brought a chart that shows that we are decreasing Air Force non

mission-capable rates by reducing backorders which are down 55

percent for Air Force items in the past 4 years. There are similar

results for naval aviation as well.

The Department also has numerous initiatives under way to increase support levels to the warfighter that will also reduce obsolete and excess inventory. For example, readiness-based sparing

uses advanced information technology to make better sparing decisions and allocate our inventory investment to best support readiness.

We have established commodity teams at the services and Department level to work with our supply base to reduce lead times

and improve quality which will reduce the amount of safety stock

we carry.

We continue to push forward with continuous process improvement and Lean/Six Sigma across the Department. We also have

significant efforts underway to upgrade and integrate our logistics

systems.

In the areas addressed by the report, our performance is comparable to commercial firms who consider excess and obsolete

write-offs the necessary cost of satisfying customers. The audit

pointed out that over $2.2 billion of items in A condition—those are

serviceable items that are new, used repaired or reconditioned—

was reported to disposal as excess for fiscal year 2002 and fiscal

year 2003. The reserve actually represents 1.65 percent of our average inventory values for those years, which is comparable to industry figures. In most large companies, inventory reserves ranged

from 2 to 4 percent depending on the industry, and we do well in

comparison considering the challenging environment we work in.

The report stated that we had $156 million per year in material

losses. At 1 percent of the Defense Reutilization and Marketing

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Systems total volume, this is less than our commercial counterparts, as you see in the third chart.

However, we realize there is much room for improvement, even

though our excess property performance benchmarks well against

industry.

Let me highlight those actions I believe can better result in our

reutilization supply chain. I had asked the military services and

the Defense Logistics Agency to evaluate their training materials

and practices so we can better assess root causes of the various

documentation errors addressed by GAO. We will review the current processes and procedures to determine if there are opportunities for tighter controls and capture of information at point of return which will enable DMRS to better categorize inventory for potential reutilization.

We are also investigating whether to create new condition codes

that will allow us to track condition code A items that are obsolete.

In addition, one way we are addressing GAO’s finding that we purchase at least $400 million of identical items in fiscal year 2002

and 2003 by using available excess items in A condition is by linking DLA and service systems with our reutilization system as they

undergo modernization.

Each of these actions is a step toward improvement in the Department. I expect that the synergy of all of them together will go

a long way toward addressing the GAO report’s recommendations,

improve our performance and, most important of all, enhance our

support to our warfighters.

Thank you for the opportunity to testify before the committee. I’d

be happy to answer any questions.

[The prepared statement of Mr. Estevez follows:]

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Mr. SHAYS. Thank you, Mr. Estevez.

General Mongeon.

STATEMENT OF MAJOR GENERAL DANIEL MONGEON

General MONGEON. Good afternoon, Mr. Chairman, and distinguished members of the subcommittee. I am Major General Dan

Mongeon, Director of Logistics Operations at the Defense Logistics

Agency.

I appreciate the opportunity to discuss the findings of the March

2005 GAO report and inform of you the actions we have taken and

will take to improve our excess reutilization program.

As the Director of Logistics Operations, I have staff responsibility

for the procurement, management, storage and distribution of some

5 million line items of our military customers.

The primary mission of DLA is to provide the best possible logistics support to America’s warfighters. In accomplishing this worldwide mission, DLA uses four major supply centers, five DLA service centers, a distribution system with 26 depots, and a reutilization and disposal service with 92 defense reutilization and marketing offices [DRMOs]. DLA operates in 48 States and 28 countries.

With me today is Colonel Pat O’Donnell, Commander of the Defense Reutilization and Marketing Service [DRMS].

Today we are here to discuss the economy and efficiencies of

DOD’s excess property reutilization program.

DRMS has operational responsibility for the reutilization program and accomplishes this mission at 92 locations throughout the

United States and in 15 foreign countries.

Mr. Chairman, we concur with the recommendations of the GAO

report. We recognize the issues identified in the GAO report and

fully understand the importance of ensuring DOD has a viable reutilization program.

The recommendations agree with a series of actions we had already initiated to increase management oversight and improve inventory management and property accountability of excess material. These actions include increased senior leadership involvement

to monitor adherence with policy, guidelines and performance

standards and quarterly progress briefings to the DLA director.

We have also established a compliance assessment program

geared toward policy oversight and monitoring the performance of

DLA’s reutilization and marketing program. We concur with the

GAO conclusion that it is critical that services and DRMS ensure

the proper assignment of condition codes.

To address this issue, the Assistant Deputy Undersecretary of

Defense for Supply Chain Integration directed the military services

and DLA to review their procedures, provide accurate excess property return and documentation, and establish appropriate accountability mechanisms for the disposal of excess and surplus properties.

To assist in this effort, I have directed the DRMS commander to

work closely with the military services to improve training and

awareness of the impact of inaccurate data. DRMS is developing

property accounting courses for employees and supervisors as well

as reviewing and upgrading its Web-based training tools for the

services.

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GAO correctly recognizes deficiencies in our current automated

systems and their impact on the concurrent purchase and disposal

issue. Long-term solutions lie in emerging automated systems.

Since 2004, DRMS has been working closely with DLA’s business

systems modernization design team to enhance support of the twofold mission of facilitating and reutilization of property in good condition and disposing of property DOD cannot use.

A modernized disposal system will provide DLA with the ability

to better manage both the near-term and long-term disposal needs

of DOD.

We agree with GAO’s concerns regarding human capital shortages. DRMS has increased the use of contract employees, sent experienced personnel TDY to the most severely affected DRMOs and

relocated some of our more experienced specialists. Also, the completion of the public-private A–76 competition will create an organizational structure that will consist of fewer DRMOs, ensure more

efficient utilization of facilities and improve work load and management.

Mr. Chairman, DLA’s top priority is to support the American

warfighter. We are confident increased leadership, oversight,

changes in policy and procedures, modern business systems, and

investment in human capital and resources will allow us to better

use our resources and ensure America’s fighting forces remain the

best equipped in the world.

I thank you, sir, and I would be happy to answer any questions.

[The prepared statement of General Mongeon follows:]

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Mr. SHAYS. Thank you, very much, General.

Colonel O’Donnell, sir, you’re going to need to move the mic closer to you.

STATEMENT OF COLONEL PATRICK E. O’DONNELL

Colonel O’DONNELL. All right, sir, Mr. Chairman, and distinguished members of the subcommittee, I am Colonel Patrick

O’Donnell, Commander of the Defense Reutilization and Marketing

Service and the Defense Logistics Agency.

I appreciate this opportunity to address your concerns regarding

the reutilization of DOD excess property in our efforts to improve

inventory accountability in the efficient use of DOD assets.

DRMS is responsible for the execution of DOD policy on the reutilization, transfer, donation, sale and environmentally compliant

disposition DOD excess property.

DRMS supports U.S. forces worldwide with personnel co-located

with the military in Iraq, Kuwait and Afghanistan. We are committed to being good stewards of the property under our control and

to ensuring compliance with DOD policies, guidelines and standards.

We have implemented many initiatives that are at the forefront

of reverse logistics. This includes processing demilitarization-required property at dedicated facilities to ensure proper disposition,

using innovative processes for disposing of excess electronic equipment, and partnering with a private sector firm to sell property on

a shared proceeds basis.

In the past year, DRMS has implemented specific improvements

to enhance reuse of excess assets within the Department, including

providing DOD customers with additional online information and

pre-receipt item visibility so that needed property can be redistributed quickly.

We are working to ensure our systems and process improvements

will become compatible and interactive with military services.

The DOD reutilization system is trusted and regularly used by

military service customers. And DRMS’s reutilization and property

disposal program performance measures demonstrate the quality of

services provided.

In fiscal year 2004, DRMS return over 160,000 line items with

an acquisition value in excess of $1 billion to DOD activities. Additionally, in April 2005, DLA Office of Operations Research and Resource Analysis study supports DRMS’s own analysis that its overall inventory shrinkage rate in fiscal year 2004 due to losses is well

below 1 percent.

DRMS recognizes its relocation of inventory accountability program can be improved. We are committed to correcting substandard performance and ensuring accountability while strengthening management controls to minimize such issues in the future.

DRMS’s actions to improve these programs include issuing a contract for commercial assistance in assessing and improving inventory data accuracy and developing additional internal audit capabilities, surveying significant generating activities to understand

why property condition may be improperly classified, why local

stock numbers are being used, and identifying barriers to using

DRMS as a source of supply, meeting with DLA supply centers to

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discuss constraints they face in using DRMS as a source of supply

and to develop program metrics and goals.

DRMS is working with headquarters DLA to outline additional

management controls and metrics to ensure proper inventory accountability and to synchronize the application of policy, oversight,

education, training and program execution. We are also working to

update our inventory accounting procedures, monitor inventory adjustments and losses, and reduce aging excess property and inventory and backlogs. DRMS spent $49 million in facilities upgrades

in fiscal years 2000 through 2004 and plans to spend an additional

$25 million in fiscal years 2005 through 2009.

Mr. Chairman and distinguished subcommittee members, we recognize the issues noted in the GAO report and are taking appropriate measures to ensure they are corrected.

DRMS stands ready to execute all policy and procedure changes

that optimize the disposition of excess property. Thank you, Mr.

Chairman, and I’m prepared to answer any of your questions.

[The prepared statement of Colonel O’Donnell follows:]

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Mr. SHAYS. Thank you all very, very much.

What is, in each of your judgments, the biggest challenge that

you face?

Mr. ESTEVEZ. Interestingly enough, Mr. Chairman, I believe that

the two issues raised by Mr. Kutz are the same two issues I’m

going to talk about. One is training, and the second is the integration of our systems.

We have folks from military units turning in material most of

the time that they no longer need so they want to get rid of it,

turning it into folks at DRMS who are now expecting to make a

judgment on the value of that material if it is improperly coded.

So it is important for us to ensure that the folks that are turning

in that material are trained properly to understand the entire

lifecycle of that material and the importance of that material

across the Department. And it is important that our DRMS folks

are trained to also make a judgment about that material and challenge as appropriate.

And in the commercial sector, turning in something to a retail

outlet or a retail store, they send it back to someone to make those

judgments.

Second, we have to have the systems integration so that, when

our wholesale system goes out and looks and says, what do we

need to buy in order to fulfill a military requirement that has come

in from the field, that it is automatic that something that was

turned in through our reutilization process is on the books. And we

are working to do that. And in fact, in January 2006, DLA’s new

Enterprise Resource Planning System will be integrated with the

DRMS system so that those items that are turned into DRMS will

automatically, that are in class A condition, that are in good condition, will be moved back into the inventory.

General MONGEON. Sir, I would really echo those two comments.

I think the training of both the services and also the DRMS personnel is absolutely key. And we have to be very vigilant in that area

and continue to improve that training and make tools available to

the services and to our employees so that they can improve the

process.

In terms of the systems integration, again, I totally concur with

that comment. And we do have a fix on the horizon. There is really

a long-term and a short-term approach. The short-term approach

is in fact linking of the current management system, inventory

management system, with the business system modernization and,

as was mentioned by Mr. Estevez, that comes on line in January

2006. So those two would be the two key areas.

The third one I would just comment on is the data validation.

And we are working very diligently on that, in terms of improving

our inventory accuracy and working a comprehensive program in

terms of personnel training, inventory accuracy and accountability

of our employees.

Mr. SHAYS. Thank you, General.

Colonel.

Colonel O’DONNELL. Sir, again, I think my comments would parallel those of Mr. Estevez and General Mongeon.

Certainly, data reliability is of critical importance to us in the

disposal business. We make all of our business decisions about

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what to do with property based on the information that we receive

about the items that are turned in to us.

Certainly that relates to the aspect of training that has already

been mentioned. And again, the importance of having the systems

integration that supports not only the buying of the property, the

use of property, and ultimately the disposition of property, will

take us a long way to sort of resolving all these problem.

Mr. SHAYS. I would like to ask each of you, what you think the

biggest success has been and your biggest failure. Not you personally, necessarily, but for the system.

Mr. ESTEVEZ. I’m going to address this across-the-broad system,

not just the reutilization system. I think we are doing a pretty good

job. We can do better. But we’re doing a pretty good job in getting

the warfighter what he needs.

We have decreased the time from moving high-priority shipments

to our forces deployed in Operation Iraqi Freedom from about 30

days in shortly after the main operation ended to down to about

15 days today.

In order to do that, we may end up having bought more than we

need, but that is important. Because it is more important to have

a soldier, sailor, airman, marine being able to sustain himself and

to have those weapons platforms operating and to have a plane flying, than it is to have it down.

Mr. SHAYS. I’m going to confirm that. And you can relate it to

lots of different circumstances. You may invite guests to an event,

and you can say, well, I’m going to have 30 people show up, but

you buy for 40 because you don’t want to have an undersupply. So

I think it is a point that needs to be made. Sometimes we are going

to have better excess supply than undersupply. That is OK.

Mr. ESTEVEZ. So we are doing fairly well today moving stuff to

support our Armed Forces in the field.

On the reutilization side, I’ll point out that we did reutilize about

$400 million worth direct reutilization within the Department of

Defense over the 3-year period and up to about $1 billion if you include some of those special program areas which are congressionally mandated and have the same rights as requisitioning material

as Department of Defense agencies or units themselves. So we did

over the period of time reutilize a good chunk of the material that

came in.

Now, obviously, we do need to do better on some of the other areas. We should not be buying $400 million at the same time. And

those areas that I addressed previously, I believe will go a long way

toward fixing those.

Mr. SHAYS. So is your biggest failure the buying of $400 million

that you shouldn’t have been buying?

Mr. ESTEVEZ. I believe that buying concurrent with things that

we are using in the inventory is our biggest failure.

Mr. SHAYS. And tell me why you think that is going to be reduced?

Mr. ESTEVEZ. That goes back two reasons, one goes back to, we

need to train better so that they identify, but really, if you make

those system interfaces that we discussed so that the buyer, who

is processing numerous orders, doesn’t have to think, it is an automatic link between his system that he is looking in to see what inVerDate 11-MAY-2000 10:38 Aug 26, 2005 Jkt 000000 PO 00000 Frm 00103 Fmt 6633 Sfmt 6633 D:\DOCS\22905.TXT HGOVREF1 PsN: HGOVREF1
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ventory we have in the wholesale system and what is in our reutilization system is automatically linked, so that he doesn’t think it

is bought and it is on the books.

Mr. SHAYS. And that interface, though, that is nothing I see happening all that quickly. What part is being interfaced you say January.

Mr. ESTEVEZ. January 2006, will be an interface between DLA’s

system that they are fielding, their enterprise planning system

called Business Modernization System, and the system that Colonel O’Donnell operates called Daisy.

Mr. SHAYS. It will begin, or it will be up and running fully implemented?

General MONGEON. It will be fully implemented. The design has

already been worked out, has been completely designed, and now,

as we go to the 2.2 roll-out of our business system modernization

process, it will be implemented. And you will have that automatic

link.

Mr. SHAYS. So, General, tell me the thing that you’re most proud

of or you consider the biggest success and what you think the biggest failure has been?

General MONGEON. I think the biggest success has been DLA’s

continued business process improvements. You heard some of those

numbers as it related to our highest level of supply available in

terms of supporting our warfighters, our lowest level of back orders, direct impact on readiness of our forces as well as reducing

the cost, the overall cost, of operating the Defense Logistics Agency.

And you’ve seen that on those charts.

In addition to that, our overall ability to work aggressively in

terms of taking on inventory accountability. As recently as 2002,

our adjustment rate was 19 percent.

Today, in second quarter of fiscal year 2005, that has been reduced down to less than 5 percent, 4.6 percent. So taking on very

seriously recommendations made on inventory accountability and

working that very hard.

Mr. SHAYS. Tell me again the percent of what? I’m sorry.

General MONGEON. These are adjustment to inventory. In 2002,

for our distribution depots, our adjustments to inventory was running at 19 percent. Today, after some very aggressive inventory accountability measures, training, holding personnel accountable,

that has been reduced down to, in this second quarter of fiscal year

2005, to less than 5 percent, specifically 4.6 percent.

In terms of improvements, where we could have improved better

or faster, I think it is in business systems modernization. I think

it is the linkage between, as you heard, or the integration of the

systems, so that we get a higher correlation between what is being

purchased and what is being turned in in condition code A.

We have moved very fast. But it would have been great if we

could have moved even faster to accommodate that linkage.

Mr. SHAYS. So, OK, I don’t want to minimize the failures. In

other words, your recognition of the failures, and I don’t want us

to be like, I asked someone what their biggest failure was or their

biggest liability when I was hiring them, and they said they were

too friendly. I want to have a better sense of what you think your

biggest disappointment, or maybe it is redundant, so give me your

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second biggest disappointment. I want to have a sense that you

have a sense of the failures.

General MONGEON. Well, I think in terms of what I just stated,

sir, is in relationship to, as was stated by Mr. Estevez, was in relationship to the $400 million that were concurrent purchases. And

I was relating that to our business systems modernization. If we

were able to move faster on that, we potentially could have avoided

the vast majority of that concurrent purchase.

Mr. SHAYS. But you think, do you think that actually gets resolved in just 6 months?

General MONGEON. In terms of linking the visibility of condition

code A items that are turned in to the individuals, the inventory

item managers that are purchasing that items, we will be able to

link the two together. So he or she will be aware that those items

are available, can look to see if they in fact are in condition code

A and then make those issues from those items as opposed to turning them in as excess.

Mr. SHAYS. You are making, Mr. Estevez, Deputy Undersecretary, you were making a statement you turned a negative into a

positive, and that may be very fair, but you basically said we

wouldn’t have known about the $400 million if we hadn’t done

what? I thought I was inferring from you that you were saying that

even the fact that we—maybe someone else made that point—that

we would have not have been able to have had any statistics on

the $400 million had we not had something else in place. Am I,

was that something I just invented from something you said?

Mr. ESTEVEZ. I’m struggling. Because I don’t remember saying

exactly that. But I did point out that was, in my view, our biggest

failure. And as General Mongeon just alluded to, I view making

that systems integration, it is one of the keys, it is probably the

key to making that fix, but I do have to point out that the training

has to be in place because you have to code it properly to enter it

into the system. So it has to be turned in at condition code A, identified as condition code A and logged in to the reutilization system

as condition code A for it to move up into the higher system as

available for reuse.

Mr. SHAYS. Do we put bar codes on our products so that you just

scan them in?

Mr. ESTEVEZ. Depending on the, you know if it comes in, its performing original package, it is going to have some kind of marking

on it.

Mr. SHAYS. So you don’t have to manually do it?

Mr. ESTEVEZ. If it is a weapons platform, if it is a part for a

weapons system, it is going to have a part mark on it. Some today

have none, that you have to code it in. We are moving so that you

have to scan everything in. And we are also moving toward the use

of radio frequency identification across our supply chain so that it

becomes an automatic entry into our inventory systems.

Mr. SHAYS. Colonel, the thing you’re the most happy about and

the thing that troubles you the most.

Colonel O’DONNELL. Sir, I guess the thing that I’m most pleased

with——

Mr. SHAYS. Move the mic just a little closer to you, sir.

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Colonel O’DONNELL. I think the thing that I am most pleased

with overall is the value that DRMS and Defense Reutilization

Marketing Service brings to the Department in terms of its ability

to execute a fairly wide range of complex tasks. As I indicated in

my opening remarks, we’re responsible for not only selling property

and reutilizing it, making sure that it is used as effectively as possible, prior to it having to be demilitarized, and our role in the environmental compliance as it relates to DOD’s hazardous waste and

hazardous materials excess, but those are tough challenges.

And the men and women who make up DRMS do a yeoman’s job

in making those kinds of things happen day in and day out.

I think the area we struggle with the most, quite honestly, is our

ability to keep our employees as well trained as we absolutely need

to in light of changing regulation at the Federal level, within the

Department, to give them the best rules and tools that we can in

order to enable them to perform their daily tasks at a level that

is consistent with what is expected of us.

Mr. SHAYS. So you say training is your biggest disappointment?

Colonel O’DONNELL. Yes, sir. Yes, sir.

Mr. SHAYS. Fair enough. Before I go to our professional staff, we

breezed through these charts. And, they’re very familiar to you but

I don’t know what is on the access and so, so just, if you would,

and Mr. Secretary, start with the DLA cost recovery rates are declining.

Mr. ESTEVEZ. Simply. DLA works in a working capital fund. So

they’re funded through sales to the military services.

Mr. SHAYS. Right.

Mr. ESTEVEZ. Through the recovery costs of those sales.

So back in the 1992 timeframe, that cost recovery was up to

about $33.

Mr. SHAYS. And the years are on your chart?

Mr. ESTEVEZ. Yes. As you can see, the cost recovery rates have

been declining.

Mr. SHAYS. Define cost recovery rates to me. What is it?

Mr. ESTEVEZ. That is the cost above the actual purchase price of

an item that DLA sells it to the military services; DLA’s working

capital funded.

Mr. SHAYS. Give me an example.

Mr. ESTEVEZ. If DLA buys a part for a helicopter at $10, they

will sell it at now $11.50 rather than $20 some years ago. That is

how DLA operations are funded, through an additional tack-on on

top of the cost of the price to the service.

Mr. SHAYS. OK. I’m so sorry, but I’m not understanding the cost.

I must be thinking of it in reverse.

Mr. ESTEVEZ. DLA buys from a vendor, from Boeing, Lockheed,

whoever, at $10, and they’ll sell it to the service at $12, to the

Army at $12. The Army gets appropriated funds from the Congress

to buy those items at that rate.

Mr. SHAYS. At $12.

Mr. ESTEVEZ. At $12. If DLA reduces the costs that it can charge

in overhead——

Mr. SHAYS. So these are overhead costs?

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Mr. ESTEVEZ. Yes, sir. These are overhead costs. So DLA is becoming more efficient, and then the service has more dollars to

buy.

Mr. SHAYS. I didn’t realize—these are basically overhead costs?

Mr. ESTEVEZ. Yes, sir.

Mr. SHAYS. And you’re getting your overhead costs down?

Mr. ESTEVEZ. Yes, sir.

Mr. SHAYS. And we can assume these are fairly reliable statistics?

Mr. ESTEVEZ. Absolutely.

The second chart shows Air Force mission-capable rates, the correlation between mission-capable rates of weapons systems—and

that is a generic across the Air Force, so it is not for a particular

aircraft—and the reduction in back orders. So if I don’t have an

item on back order—in other words, you’re waiting for the item because it is not in the inventory, and it is not available from the industrial base—I have weapons systems that are sitting idle. If I decrease the back orders and get that material out to the force, I am

decreasing the amount of mission-capable rates of the weapons

platforms. So I’m getting better utilization of the material that the

Department has bought for use to defend the American people.

Mr. SHAYS. And the third one?

Mr. ESTEVEZ. And the third one shows industry averages, by

year, of what the industry would call shrinkage, how much the industry loses. And that is not just in retail operations. That is

across, you know, warehousing and, for specific industries, and of

course, we are a mix of industries, but industry average is, as you

can see, about 1.7 percent across the board, and in our DRMS, we

are down to about 1 percent, and that relates on the $466 million.

Now that is not to say that we want to live with having a 1 percent

unaccountable rate. We of course want to have a zero unaccountable rate.

Mr. SHAYS. Yeah.

Let me just tell you how we will proceed, and I think this will

be a good way.

General, you basically have said we can look in 6 months to some

integration of systems, and it would seem to me and you said it

will be online running, so I assume you’ll start to process it in before. So if we had a hearing a year from now, will you all be in

that same capacity a year from now or will we be dealing with different people?

General MONGEON. I will not be. No, sir.

Mr. ESTEVEZ. It is my plan to be, sir.

Mr. SHAYS. Fair enough. That’s good.

Colonel.

Colonel O’DONNELL. No, sir. I will not then either.

Mr. SHAYS. That triggers the question, what is the amount of

time that someone serves in a capacity like you’re in General.

General MONGEON. Normally 2 years.

Mr. SHAYS. Colonel.

Colonel O’DONNELL. Two years sir.

Mr. SHAYS. Just, that is probably unfortunate, frankly, you

know, but at any rate, your predecessors are going to either say,

well, the General is right or he is wrong. Because we are going to

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get you back here, or your replacements, in a year, and that hopefully we will have a good story to tell. Hopefully, we will have a

good story to tell.

General, when would you be leaving? What is your——

General MONGEON. Sir, I’ll be leaving around October of this

year.

Mr. SHAYS. Well, we may have you be a duplicate witness here,

so don’t hide from us. We’re going to have the professional staff ask

a few questions. And what I would like GAO to do, and I appreciate your staying, I would like you to just, you know, at the end,

just say the things that, just comment on what you’ve heard in this

testimony.

Yes. OK.

Mr. CHASE. Either to the general or to Mr. Secretary Estevez.

One of the previous witnesses, Mr. Rhodes, suggested an improvement might be linkage between the excess property system and the

acquisition systems, so there was no—in a sense—put in a lockout

system. Did you have any thoughts about his recommendation.

General MONGEON. Let me start out. Essentially that system

modernization, that linkage between the inventory system that the

DRMS is currently using, Daisy, linked to DSM, what that does is

it identifies to the item manager that those items would be in condition code A, and that he should automatically put those in stock.

Now, there are criteria for that in terms of his—where his position is. But if he is going to buy it within the next 6 years, then

it’s going to automatically put it in stock.

Mr. CHASE. OK. Going back to the systems, then, you have indicated that January 2006 you expect completion. Now, in your response to GAO, in the recommendations regarding inventory management improvements, you mention something about full operational capability for the DRMS RMP will be realized in fiscal year

2009. Could you explain what that is, and tell us whether that can

be implemented any sooner than fiscal year 2009?

General MONGEON. That is the long-term plan in terms of modification of the reutilization system; so that is coming on board after

Business System Modernization. So that’s the major integrated

program for the Defense Logistics Agency, BSM. The long-term solution comes on with an implementation date of 2009, so it’s a more

comprehensive, more sophisticated capability. Pat might want to

add something in addition to that.

So we have a near-term fix, which was mentioned by GAO as

being very important, and we have a long-term fix, and the combination of those two give us where we think we need to be.

Mr. CHASE. What happens if the Business System Modernization

program is delayed? They’re still trying to count the number of systems they have on hand.

General MONGEON. We are in the process of rolling out our Business Systems Modernization as we speak. We have met every milestone, so that is going very successfully. We are integrating about

200 customers every month, 200,000 items. We are learning in that

process, and right now that is a very successful program rollout. So

we have a considerable amount of time under our belt right now,

and we anticipate that success will continue throughout the final

rollout of the Business System Modernization.

105

Mr. ESTEVEZ. Just to clarify there. DLA has one instance of a

system that’s being modernized, they’re rolling out a resource planning solution. That is not the overall business management systems of the Department of Defense. That’s their instance of it, and

obviously that doesn’t take into account all the finance systems in

the Department or the logistics systems.

DLA’s rollout, for what is a commercial product, is the largest

rollout of that product, as is the Army-specific rollout. And these

are products that are out in the commercial sector and regularly

used.

Mr. CHASE. I’m curious. I don’t understand how brand-new material, unused, new, ‘‘A’’ condition material can be scrapped or

junked. Could you explain that? I’m not sure I understand how

something new is scrapped or is junked.

Mr. ESTEVEZ. There’s a number of reasons why.

We have the two issues; we have stuff that we’re buying concurrently, and then we have other stuff that’s in A condition that may

be—I won’t call it junk—that we either donate out to other agencies, or is used somewhere else in the Federal Government, or it

could end up being sold. It has to do with what’s the admission of

the Department, what is the status of that item. It can be a new

item that we potentially could have bought and now have a technological upgrade so we no longer need that. We no longer use the

old body armor; we use the new body armor because it has better

protective capabilities for our forces.

Mr. SHAYS. So what you’re saying is if you have old body armor

that’s new, it’s not that it’s——

Mr. ESTEVEZ. That’s correct. And there is—that applies across

the board.

An upgrade in something, we want our forces to have the best

that’s available. And in certain instances, if it’s a modernization of

a weapons platform, then the old stuff is no longer needed even

though it’s still in new condition, because we just did a mod on the

platform.

Mr. CHASE. Well, I understand the body armor example, but

what about the tent example?

General MONGEON. I would say in terms of the tent example, it’s

one of those areas where it was the condition code; the condition

code was marked condition code H. That is part of what we have

all said is in fact a training issue, and we have to work very closely

with the services and with our personnel to ensure that those items

are coded correctly. That is an item that we are still buying, not

in large quantities, but the fact of the matter is they in fact were

condition-coded items turned in, and that we should be able to pick

those up. And they should have been in condition code A, marked

in condition code A, so that then would have had the visibility potentially as an example on a want list.

We have some automated processes, you can go to the Web; organizations have a want list. So let’s say somebody needed those

tents for reutilization. If it had been turned in in condition code A

and it had been on their want list, it would have automatically

linked up and they would have been able to get it.

106

So going back to what Mr. Estevez said, going back to what Colonel O’Donnell said, training and adherence to making sure that the

proper condition code is marked on these items is very important.

Mr. CHASE. When did you implement the want list program?

Colonel O’DONNELL. Sir, the want lists have been in effect for

over a year now. And it’s a tool; again, a way of trying to enhance

our overall reutilization program by giving our customers, across

the spectrum of military organizations, the ability to tell DRMS the

kinds of property they need and the types of quantities that they’re

looking for. They can come on our Web site, give us that product,

which then is screened against our inventories for a prescribed period of time, hopefully with the expectation of fulfilling the requirements.

Mr. CHASE. OK. GAO raised the question of restricted items that

they were able to obtain. Why isn’t DLA able to restrict unnecessary purchases?

Colonel O’DONNELL. Let me go ahead and answer that one, sir.

NonDOD entities within the Federal Government can, in fact, acquire restricted property through a reutilization, or the RT program, reutilization and transformation and donation program, depending on where they fit in terms of eligibility.

The decision to release property which has some sort of restrictive characteristic rests with GSA, who has proponency for property utilization throughout the Federal Government, which would

account for why GAO could use their DODAC to come in and requisition that property.

Mr. SHAYS. Could you just explain it? GSA, outside of DOD,

doesn’t have ownership of this; they have to give approval to another government agency to buy something from you?

Colonel O’DONNELL. They have to give, sir, approval for a

nonDOD organization to withdraw property from DRMS that has

a restrictive characteristic. Having said that, they are also obliged

to tell that organization that they have to sign a statement that

says you recognize that this item, for example, has a DRMO requirement and that you will abide by the tenets of that DRMO requirement when you, in turn, get ready to dispose of that property.

But GSA is the proponent, if you will, for property reutilization

throughout the Federal Government, and they are delegated that

responsibility for DOD down to the Defense Logistics Agency.

Mr. SHAYS. Is it your testimony that GAO would not have been

able to buy that restricted property—excuse me, correction. I will

say it just this way: Is it your statement that the only way GAO

was to buy this restrictive property is because they were GAO, and

that they would not have been able to buy it if they had tried to

buy it privately?

Colonel O’DONNELL. That’s correct, sir. Those items up on the podium there were requisitioned through DRMS, using a DODAC

that had been assigned a Department of Defense activity address

code that had been assigned to GAO, enabling them to acquire

property from us.

Mr. CHASE. Colonel, could we move on to the point that the GAO

made regarding the storage of material that was destroyed or

weather damaged? They specifically said in their report, property

was improperly stored outside for several months at the Huntsville

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liquidation sales location and I guess was damaged due to the hurricane. Have you gotten a handle on how you could prevent that

in the future?

Colonel O’DONNELL. Sir, the situation that was described in the

GAO report with respect to our facility down in Huntsville has, in

fact, been corrected. It was a—the result, rather, of a series of

events that sort of cascaded upon themselves.

First and foremost was that the team that we had down at our

sales partners office at Huntsville was unable to keep up with the

volume of property that was coming to them in terms of their ability to sell it and to turn it over at a sufficiently rapid rate that

would ensure that all the property they were receiving could, in

fact, be stored inside. They made some decisions that particular

management team at that particular site needed to be replaced,

and they have, in fact, done that. We, DRMS, have put some additional manpower down at Huntsville to help monitor what is going

on, not only within our sales partners operations, but how that all

relates back to the flow of property from DLA depots.

As to the fact that we had property stored outside which ultimately was weather damaged, again, that was a function of there

being more property in the pipeline than our sales partner could

deal with based on the skills, I guess, and the ability of the team

that they had on board at the time. Again, we’ve rectified that.

We’ve worked with our sales partner, they have made some significant improvements in terms of the caliber of folks that they had

down there. And the problem that existed at the time of the audit

no longer exists.

Mr. CHASE. So I understand that was a private contractor that

was responsible for that location?

Colonel O’DONNELL. For the sales operation co-located at our

DRMO at Huntsville, AL, yes, sir, that is correct.

Mr. CHASE. Were we—or have we considered trying to recover

some of the acquisition value for that material from the contractor?

I mean was it—you know, was it something that he could have prevented that maybe we should try to recover?

Colonel O’DONNELL. In this instance, no, sir, I don’t think that’s

the case at all. I mean, the fact is there was more property coming

his way than he had the capability at the time to deal with. But

by the same token, we had a responsibility to say there is more

property in the pipeline, let’s divert that to another location. Which

ultimately we wound up doing to help solve that particular situation.

Mr. CHASE. Another point raised in the report was the issue of

missing items, 72 chemical and biology protective suits, protective

gloves, weather parka. Given the losses that GAO identified, what

is DLA’s criminal investigative agency doing to access the DRMO’s

security and vulnerability?

Colonel O’DONNELL. Sir, the DLA Criminal Investigative Agency

routinely conducts criminal vulnerability assessments of our

DRMOs. And I can’t speak in this particular instance, but those inspections take place on a routine basis; they put a team of investigators down there, and they look at our operation from the standpoint of what process improvements do we need to make, what do

we need to do in terms of improving physical security, the way we

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handle property, the way we account for property. And we find

those to be very, very useful tools.

General MONGEON. If I might just expand on that point. The JS

list very specifically—and I think comments were made by GAO in

terms of when they went on to look since the last time of the hearing when what was discussed, they found all those items being

available. There have been very aggressive actions taken, and

there is an organization called the Joint Service MBC Equipment

Assessment Team. All of that equipment and MBC-related items

now flow to those four sites. And in the past, a very avowed criticism that those items were in batch lots and they were coming in;

and thus you did not have the direct accounting of those, because

they might have said I turned in 50 suits, and there might be more

pants than jackets, etc.; that process was ongoing during that investigation. We no longer accept batch lots. All of the items that

are now turned in, JS lists, are reviewed at those sites. They make

the determination if they are serviceable for reutilization. In the last year, they have determined about $1.3 million worth

is for reutilization; if it is not for reutilization in terms of being

able to be used, then it is marked clearly for training. And if it is

unserviceable, then it is turned in to be destroyed. I think that is

one of the examples of where DRMS has taken and the services

have taken the recommendations of the committee very seriously.

Mr. CHASE. That just raised another point. Have any more of the

250,000 BDOs turned up, the defective BDOs?

General MONGEON. Not to my knowledge. Not to my knowledge.

Mr. SHAYS. We’re going to close up here. But let me be clear.

From each of you, is there anything that GAO said—you’ve said

what you’ve agreed with in the recommendations; is there anything

in the testimony they gave today that you would take issue with

or would choose to qualify? I mean, we qualified one—and I would

like GAO to respond—that the restrictive items that they got, they

were able to get not as private citizens but as a government agency. Still, they shouldn’t have gotten it. What use did it have to

them?

But is there anything else that you would have disagreed with

what they said? And then I’ll make the assumption that you agreed

with what they said. I mean, you were here listening to some pretty hard stuff. Or any members, what I said, or anyone else said?

Mr. ESTEVEZ. With regard to what is called waste, the stuff that

we no longer need that goes out to—and again, I’m not talking

about things that we do concurrent buys on. If we no longer need

it in the Department and we excess it and it is reutilized either by

some of the congressional mandated agencies that have the same

rights to the materials that the Department of Defense has, or if

it goes out to first responders or States or some other people that

review that, that’s valid use of that; and, in fact, it’s helpful to the

American taxpayer in many instances, or State taxpayer as the

case may be.

The other stuff that we no longer need that goes for sale through

our government contractor, we believe we are getting the best price

available. That goes for open auction. And we have two choices at

that point. You can either not sell it and hold it, and there is a cost

related for doing that; or you can get it off our books and off our

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management control because we no longer need it, and get the best

return on the dollar that we can get at that point.

So I’m not sure what—we keep hearing the pennies on the dollar

point, but we are getting the best value that we can get through

that open auction at that point, without holding that material for

an undisclosed amount of time.

So I just want to characterize what is being called ‘‘waste,’’ as we

view if we no longer need it, we’re getting the best return that we

can possibly get on that.

Mr. SHAYS. OK. Colonel, anything that you would—Colonel, anything that you would want to take issue with or that you want to

qualify that you heard from the previous panel or any Member of

Congress?

Colonel O’DONNELL. Yes, sir. I think that Mr. Estevez has said

the point that I would have made exceptionally well.

Mr. SHAYS. If I could have GAO just join, and this is not a debate—I’m sorry, General.

General MONGEON. I did have one comment, sir.

Mr. SHAYS. I’m sorry, I didn’t mean to overlook you.

General MONGEON. The comment I would make is—and I use the

gasoline burner unit as an example. While the gasoline burner unit

is in condition code A, there is a modernization program going, and

it happens to be called the modern burner unit. So as units are deploying, they are being fielded, the new item. And so while we have

in fact sold a very small amount of these burners and buy a very

small amount, we are in a transition program.

And I think what you find in a number of these programs, a

number of these areas, that you’re in a transition program. So the

units that we’re deploying, the forces that we’re deploying, we’re

deploying with the modern burner unit, the replacement for that.

That gasoline burner is still a condition code A item, but in fact

it is not the most modern item.

With an example that was mentioned for the NSA computers,

and just to embellish the point that Mr. Estevez made, in fact the

LESO that was able to get those computers, they in fact are 1 of

the 12 congressionally mandated programs that in fact have access

to it on an equal footing with the Department of Defense.

Mr. SHAYS. Right, OK.

Mr. Kutz, just tell me, from the testimony you heard here—and

this is not—this is a dialog, not a debate. But help me kind of sort

things out; what would you find—is there anything that was said

that basically you would want to give us your perspective that

would differ? Or, for the most part, do you concur with the comments that were made?

Mr. KUTZ. For the most part. I would say a couple of things. The

issue of shrinkage. I mean, I understand the perspective of the 1

percent, and we didn’t look at it from that perspective necessarily,

but it is important to note that we are still talking about things

like body armor, aircraft helicopter parts, chem-bio suits and circuit cards. I’m not sure that is a relevant apples-to-apples comparison completely to say that this excess property system in the military losing things is the same as the retail entity losing things. So

I think that’s a broader perspective I would have on that issue.

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With respect to the items that we’ve requisitioned—and maybe

we weren’t clear in our testimony that we had requisitioned those

because we didn’t pay anything for those except a little bit of shipping. It was really the medical instrument chest and the parts supply and the circuit cards, we requisitioned those at GAO, whereas

everything else we bought on the Internet with our undercover

credit card.

Mr. SHAYS. What were the two that you did at GAO?

Mr. KUTZ. Well, there were three; there were the parts supply,

the circuit cards—exhibit 3 and 2 over there—and then the medical

instrument chest.

Mr. SHAYS. Is there any restricted item that you got not through

GAO but as a result of just private citizen—your card?

Mr. KUTZ. No, I do not believe so.

Mr. SHAYS. I mean, I just think that’s important to point out.

These still are restricted items, but it’s not like I could have gone

on and gotten them.

I was thinking that, you know, in your work, if you assign people

to look at something, in a way you almost hope they find it so you

feel like you are accomplishing something and doing your job. But

I would think your biggest satisfaction would be when you come

back here a year from now—I didn’t ask you; will you be in your

position a year from now?

Mr. KUTZ. If you would like us to do certain studies. If you want

us to test their system in January or whatever the case may be,

we will work with you on that.

Mr. SHAYS. I want to come back a year from now. And I would

think your biggest satisfaction would be to—and maybe not to the

extent that you did—but test the system out again, and to find that

you didn’t—you weren’t as successful in breaking through the system or finding things that were being sold that were also being

purchased. I mean, if that system works, General, as you hope, I

would think that frankly that would say to GAO, gosh, we accomplished something. That would be my view.

Mr. KUTZ. Absolutely. We would agree with that.

Mr. SHAYS. And General, if whoever takes your place comes back

here—and Mr. Estevez, you will be here—and if we have the same

story, I will feel like we failed. I will feel like all of us failed. So

I hope we see some good success here.

Is there anything, gentlemen, that we should have asked that we

didn’t ask that you want part of the record?

Mr. Kutz, anything that you want to conclude with?

Well, again, thank you for your service, and we will hope that we

see some significant progress. Thank you. This hearing is adjourned.

[Whereupon, at 4:43 p.m., the subcommittee was adjourned.]

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