United States General Accounting Office

GAO Report to Congressional Requesters

March 1999 DEFENSE

INVENTORY

Navy’s Procedures for

Controlling In-Transit

Items Are Not Being

Followed

GAO/NSIAD-99-61

GAO United States

General Accounting Office

Washington, D.C. 20548

National Security and

International Affairs Division

B-279507 

March 31, 1999

The Honorable Richard Durbin

The Honorable Tom Harkin

United States Senate

The Honorable Peter DeFazio

The Honorable Carolyn B. Maloney

House of Representatives

In February 1998, we reported that the Department of Defense (DOD) did

not have receipts for about 60 percent of its 21 million shipments to end

users in fiscal year 1997.1

 Among the DOD components, the Navy was

responsible for almost one-half of DOD’s 12.4 million unacknowledged

receipts. As agreed with your offices, we reviewed selected aspects of the

Navy’s management procedures for controlling items in transit. More

specifically, we (1) identified the reported value and types of inventory in

transit within and between storage and repair activities, vendors, and end

users that were unaccounted for (or lost) and (2) assessed the Navy’s

adherence to procedures for controlling such in-transit inventory.

This report is one in a series addressing defense inventory management as

a high-risk area in the federal government because of vulnerabilities to

fraud, waste, and abuse.2

 Excess property that is in transit between the

military services and disposal offices is the topic of a separate report we

will issue later this year.

Results in Brief The Navy has not effectively controlled its in-transit inventory and places

enormous amounts of inventory at risk of undetected theft or

misplacement. For fiscal years 1996-98, the Navy reported that it had lost

over $3 billion in in-transit inventory, including some classified and

sensitive items such as aircraft guided-missile launchers, military night

vision devices, and communications equipment. The Navy’s Inventory

Control Point (NAVICP) at Philadelphia, which manages the largest portion

of the Navy’s inventory, reported the largest losses—$2.5 billion, or

1

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

2

In 1990, we began a special effort to review and report on the federal program areas we identified as

high risk because of vulnerabilities to waste, fraud, abuse, and mismanagement. This effort, which was

supported by the Senate Committee on Government Affairs and the House Committee on Government

Reform, brought a much needed focus on the problems that were costing the government billions of

dollars. We identified inventory management as high risk in our 1999, 1997, 1995, and 1992 high-risk

reports. A list of related GAO products is at the end of this report.

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84 percent of the Navy’s in-transit losses. However, our work showed that

a few of the items reported as lost by NAVICP Philadelphia had in fact been

accounted for in inventory records.

Navy activities involved in issuing and receiving inventory items have not

always followed the Navy’s control procedures to ensure that in-transit

items are accounted for. Specifically,

• Navy units have not always reported to NAVICP Philadelphia that they

received requested items.

• Ineffective accounting systems have been used to monitor receipts of

items redistributed between storage activities, shipped to and from repair

facilities, and shipped from end users.

• NAVICP Philadelphia and its shipping and receiving activities have not

adequately investigated unreported receipts of items redistributed

between storage activities, shipped to and from repair facilities, and

shipped from end users.

• NAVICP Philadelphia has not monitored receipts of items it purchased from

commercial sources. As early as 1990, we reported that there were

indications of inadequate internal controls over procured assets.

• Naval Supply Systems Command and NAVICP Philadelphia oversight of

in-transit inventory has not been adequate. Although Navy officials have

initiated actions intended to correct the problems we cited, the Navy has

not established any performance measures, milestones, or timetable for

reducing the vulnerability of in-transit inventory to theft or loss. Further,

the Navy has not identified management of in-transit inventory as a

significant weakness in its assessments of internal controls, as provided in

the Federal Managers’ Financial Integrity Act of 1982.

When considered as a whole, weaknesses in monitoring and controlling its

in-transit inventory have undermined the Navy’s ability to measure

progress toward achieving the goal set out in DOD’s Performance Plan for

fiscal year 1999, which responded to requirements of the Government

Performance and Results Act. For example, in its plan, DOD sets a goal of

achieving 90-percent visibility over its inventory by 2000.

To improve controls over the Navy’s in-transit inventory, we are

recommending that the Secretary of the Navy ensure that (1) receipts of

in-transit shipments are adequately accounted for and monitored;

(2) records of inventory receipts are routinely updated; (3) in-transit

inventory problems are included in assessments related to the Federal

Managers’ Financial Integrity Act; and (4) performance measures,

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milestones, and timetables are established to help monitor progress in

reducing Navy inventory’s vulnerability to loss.

Background As of September 30, 1997, the Navy reported that the value of its inventory

was $16.8 billion.3

 The Naval Supply Systems Command (NAVSUP)

administers the Navy supply system and provides in-transit inventory

management policies and procedures. The Command, through its NAVICP,

4

initiates purchases and directs inventory movement for its customers.

Until the inventory reaches its intended destination, NAVICP refers to it as in

transit. The major categories of in-transit inventory are as follows:

• Warehoused material—material redistributed between storage activities,

broken items shipped from Navy consolidation points to a commercial or

other military service repair facility, and material returned from a

commercial or other military service repair facility or an end user.

• Purchased material—new material shipped from a commercial source to a

storage activity.

• End-user material—material ordered from a storage activity or

commercial source by a unit that expects to use it.

The Navy is required to use a variety of inventory tracking procedures to

monitor shipment and receipt of in-transit items. Although the specific

procedures for each major category have some differences, they all have

three common control elements. First, the recipient of the material is

responsible for notifying the NAVICP once the item has been received. This

notification is an internal control designed to account for all in-transit

assets. Second, if within 45 days of shipment NAVICP has not been notified

that a shipment has arrived, it is required to follow up with the intended

recipient. The rationale behind this requirement is that until receipt is

confirmed, the exact status of the shipment is uncertain and therefore

vulnerable to fraud, waste, and abuse. Third, the Navy is required to

oversee in-transit inventory to assess the effectiveness of policies and

procedures governing that inventory. Appendix II contains additional

3

This amount includes three categories of items that are valued differently. Serviceable items are

valued at the latest acquisition cost; the value for items requiring repair are reduced by the cost of

repair; and excess, obsolete, and unserviceable items—reutilization/disposal inventory—are valued at

salvage prices (2.7 percent of latest acquisition cost for fiscal year 1997). However, the standard price

(i.e., latest acquisition cost and a surcharge covering the costs to operate the supply system) is used

throughout DOD in its logistics systems. Therefore, throughout the remainder of this report, the

standard price is the value associated with in-transit inventory.

4

NAVSUP has one Inventory Control Point that has offices in two cities—Philadelphia and

Mechanicsburg, Pennsylvania.

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details on the receipt acknowledgment and follow-up procedures for

in-transit items.

Implementing inventory controls is a shared responsibility of the NAVICP

and shipping and receiving activities, which include Defense Logistics

Agency (DLA)5

 and Navy-managed activities, and repair facilities.

Accountability Is Lost

for Substantial

Amounts of In-Transit

Inventory

The Navy reported that it was unable to account for substantial amounts

of in-transit inventory. This inventory is vulnerable to theft or loss and

could cause managers to implement inefficient, ineffective decisions and

practices regarding purchases. Between October 1995 and

September 1998, the Navy reported that it wrote off as lost in-transit

inventory valued at over $3 billion. Our analysis of financial reports

showed that NAVICP Philadelphia was responsible for about $2.5 billion, or

84 percent, of these losses.6

 Figure 1 summarizes the value of in-transit

inventory losses by inventory control point.

5

The Defense Logistics Agency operates and manages storage activities. It receives, stores, and issues

inventory and maintains inventory records.

6

Between October 1995 and September 1998, NAVICP Philadelphia reported $32.4 billion in

warehoused material had been in transit at one time or another during the period.

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Figure 1: Reported Value of

Navy-Owned In-transit Inventory

Losses by Inventory Control Point

• 6%

Mechanicsburg ($175 million)

84% • Philadelphia ($2,544 million)

•11%

Other DOD components ($324

million)

Note: Numbers do not add due to rounding.

The Navy’s in-transit inventory losses may be greater than the Navy

recognizes because of uncertainties about the status of shipments to end

users that did not have a corresponding notification of receipt. Figure 1

does not include any unaccounted for shipments to end users. For

example, as we reported in February 1998, DOD did not have receipts for

about 60 percent of its 21 million shipments to end users in fiscal 

year 1997. Among the DOD components, the Navy was responsible for over

one-third of DOD’s 21 million shipments and almost one-half of DOD’s

12.4 million unacknowledged receipts (valued at $11.7 billion).

Our review of 30,314 lost warehoused shipments (representing 132,793

items worth $753 million) at NAVICP Philadelphia in fiscal year 1997 showed

that over 8,000 shipments contained military technology that needed to be

protected.

Classified and sensitive items7

 included aircraft-guided missile launchers,

military night vision devices, and communications equipment. Moreover,

7

Classified items require the highest degree of protection in the interest of national security. Sensitive

items, that is, those items that are of high value, highly technical, or hazardous in nature and small

arms, ammunition, explosives, and demolition material, require a high degree of protection and control

due to statutory requirements or regulations.

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some shipments reported as lost included pilferable items such as radio

sets and radar transmitters that have a ready resale value or civilian

application and are therefore especially subject to theft. Although not

categorized by DOD as pilferable, the lost items also included such items as

video recorders and generators. Figure 2 summarizes the items lost in

transit by security classification and figure 3 shows the items’ value.

Figure 2: Our Analysis of the Number

of Lost Warehoused Items Managed by

NAVICP Philadelphia

15.66% •

Classified-20,797

0.03%

Sensitive-36

1.04%

Pilferable-1,381

74.86%•

Unclassified-99,405

•

8.41%

Unknown-11,174

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Figure 3: Our Analysis of the Value of

Warehoused Material Losses Managed

by NAVICP Philadelphia

44.03% • Classified-$331.4 million

0.02%

Sensitive-$0.119 million

1.46%

Pilferable-$11.0 million

53.66%•

Unclassified-$403.9 million

0.84%

Unknown-$6.3 million

Note: Numbers do not add due to rounding.

Naval Supply Systems Command and NAVICP Philadelphia officials pointed

out that in-transit losses for high-dollar items have declined from 

$1.2 billion to $600 million over the past 3 fiscal years but acknowledged

that in-transit inventory continues to be a primary concern. According to

these officials, in some instances the reported in-transit inventory losses

might have resulted from accounting adjustments and, as such, were not

real losses. They further stated that in most cases, the reported losses

occurred because activities involved in the movement, repair, and storage

of in-transit items did not (1) notify NAVICP Philadelphia that they shipped

or received items as required by Navy regulations or (2) respond to

follow-up inquiries made by NAVICP Philadelphia. However, as we note in

the following section, our review of lost in-transit sample items revealed

that the failure to comply with procedures for controlling in-transit

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inventory did not stop with the issuing, shipping, and receiving activities

and did not result from accounting adjustments as Navy officials asserted.

Procedures and

Systems for

Controlling In-Transit

Inventory Are

Ineffective or Not

Followed

As a result of several significant control weaknesses, the Navy’s in-transit

inventory is highly vulnerable to fraud, waste, and abuse. First, end users

have not routinely reported receipt of items to the NAVICP. Second, the

integrated accounting and logistics systems that tie the Navy’s accounting

systems to its in-transit inventory tracking systems have not been

effective. Third, NAVICP Philadelphia and its issuing activities, intended

recipients, and commercial carriers have not adequately investigated cases

in which warehoused material was not acknowledged as received. Fourth,

NAVICP Philadelphia has not monitored the receipt of purchased material

from commercial sources. Fifth, NAVSUP and NAVICP Philadelphia have not

provided adequate oversight and monitoring of in-transit inventory.

End Users’ Receipts of

Material Were Not

Routinely Reported

End users have not routinely reported receipt of items to NAVICP

Philadelphia. For a 1-year period ending in May 1998, NAVICP Philadelphia

closed the records for over $743 million in shipments that did not have a

notification of receipt and had been outstanding for over 90 days. The

NAVICP transfers accountability of material when it issues a release order to

a DOD storage activity to ship the material and then to customers when

they receive the material. End users are required by DOD policy to record

receipts of material and notify the appropriate inventory control point

within 5 calendar days (either electronically or by mail).

We judgmentally selected for review 92 reported end-user shipments

(valued at $5.2 million) whose receipt, according to NAVICP Philadelphia

records, had not been acknowledged. We sought to determine whether

those shipments had in fact been received and reported to NAVICP

Philadelphia. According to NAVICP Philadelphia officials, 51 of the 92

shipments (valued at over $566,000) were to storage activities and had

been incorrectly shown as end-user shipments. Thus, the records of the

shipments should not have been closed by the NAVICP Philadelphia

automated tracking system for end-user receipts. We then reviewed the

status of these 51 shipments in the warehoused material receipt tracking

system. NAVICP Philadelphia and the intended recipient were unable to

provide evidence that four shipments had been delivered or received. The

remaining 47 shipments had been received.

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Of the remaining 41 shipments (valued at $4.7 million), we determined that

28 (valued at $3.3 million) had in fact been received and accounted for, but

the receipt acknowledgments had not been sent to NAVICP Philadelphia.

According to one Defense Automated Addressing System (DAAS)8

 Office

official, the end users’ receipt acknowledgment codes were obsolete.

Consequently, DAAS did not forward the acknowledgments to NAVICP

Philadelphia. When we informed end-user officials that their

acknowledgment codes were obsolete, they said that the Navy had not yet

changed its reporting systems and procedures to conform with DOD’s

changes in the codes. Our review also showed other shortcomings in the

execution of in-transit control policies and procedures for the remaining

13 shipments. For example:

• One shipment valued at $606,330 was assumed by NAVICP Philadelphia to

have been received by the end user but was never shipped by the depot.

• Twelve shipments valued at $737,986 had been received by the end user

but were not reported to NAVICP Philadelphia. End-user officials said that

their automated logistics system is not designed to acknowledge material

receipt. However, DOD policy states that if the reporting activity cannot

transmit receipt electronically, it should prepare a manual material receipt

acknowledgment and mail the form directly to the inventory control point.

Integrated Accounting and

Logistics Systems Were

Not Always Effective

Because of poorly integrated accounting and logistics systems, the Navy

may have written off as lost millions of dollars of warehoused material

shipments that had actually been received and accounted for by NAVICP

Philadelphia and in DAAS historical records. Navy policy for following up

on in-transit material states that the NAVICP should search its internal files

for delinquent receipts of warehoused material shipments. Delinquent

shipments, according to Navy policy, should be written off as inventory

losses if their receipts remain unconfirmed after 6 months or 11 months,

depending on their value. According to Navy policy, shipments of

consumable items, depot-level reparable items, and appropriated

purchases9

 valued at less than $2,500, $15,000, and $20,000, respectively,

should be written off as inventory losses if their receipts remain

unconfirmed after 6 months. All other shipments require external

8

The DAAS Office is the single most comprehensive source in DOD for identifying the movement of

in-transit material. It receives a vast amount of shipping and receiving data and passes this information

to the appropriate inventory control point.

9

Consumable items are individual parts or assemblies that are disposed of when replaced. Depot-level

reparable items are components or assemblies that are returned to the supply system to be repaired

when replaced. Appropriated purchases are centrally purchased items that customers receive without

charge from their respective supply systems.

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follow-up and should be written off as lost if their receipts remain

unconfirmed after 11 months.

At NAVICP Philadelphia, 15 (16 percent) of the 94 warehoused shipments

that we sampled were written off as lost despite the fact that their receipts

were recorded in NAVICP Philadelphia’s internal files and DAAS historical

records 6 months to 1 year in advance of the date they were written off.

These discrepancies reduce the reliability of inventory financial reports,

which thus obscure true inventory losses, such as those resulting from

theft or loss, and misstate the number of items on hand.

We informed NAVICP Philadelphia officials that their internal and DAAS

history files contained receipts for 15 warehoused shipments that were

written off as lost. They said that in 11 cases, they had not accurately

identified these receipts because the Navy’s general ledger system, which

ties its accounting systems to its logistics and other key management

systems and is used to identify the receipt of shipments, did not update

both accounting and logistics records with the in-transit inventory

receipts. In the other four cases, the receiving activities did not correctly

enter receipt data into the logistics system; thus, the NAVICP’s integrated

systems showed that the items were not received. NAVSUP officials said that

until the planned resystemization of its databases is complete, NAVICP

Philadelphia would need to rely on the Navy’s general ledger system to

identify the receipt of shipments. Our prior reports have pointed out

deficiencies in DOD’s existing accounting and related systems, including its

logistics systems.10

NAVICP’s External

Follow-Up/Resolution of

Warehoused Material Was

Not Adequate

Although Navy policy requires external follow-up of unconfirmed receipts

of warehoused material over a certain dollar threshold, NAVICP Philadelphia

has not adequately followed up or resolved such receipts. According to

Navy policy, the NAVICP should first seek proof of shipment from the

issuing activity on shipments of consumable items, depot-level reparable

items, and appropriated purchases valued at more than $2,500, $15,000,

and $20,000, respectively, within 45 days from the date the material was

issued. After obtaining that information, the NAVICP should seek proof of

delivery from the shipping carrier. Navy policy, however, does not set a

specific time limit for replies from issuing activities, shipping carriers, and

intended recipients.

10High-Risk Series: Defense Financial Management (GAO/HR-97-3, Feb. 1997) and Inventory

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

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We sampled 17 warehoused shipments (valued at $2.3 million) that

required external follow-up. For these shipments, NAVICP Philadelphia

officials explained that commercial carriers, storage activities, and repair

contractors did not respond to their follow-up requests and the shipments

were later written off as lost. However, our review showed that 2 of the 17

shipments (valued at $215,760) were erroneously written off as lost but in

reality had been acknowledged as received and accounted for in NAVICP

inventory records. For the remaining 15 shipments (valued at $2,085,200),

NAVICP did not follow up when receipts were not returned. Specifically, in 

6 of the 15 shipments (valued at $910,600) NAVICP Philadelphia did not

adequately follow up for proof of shipment, delivery, or receipt with the

appropriate activities. For three other shipments (valued at $479,040), the

carriers did not respond to NAVICP’s requests for proof of delivery, and

NAVICP did not initiate claims against the carriers. For five shipments

(valued at $647,230), the storage or repair activity did not respond to

NAVICP’s requests for proof of receipt. NAVICP Philadelphia officials could

not explain what happened to the remaining shipment (valued at

$48,330) and could not provide documentation that they had followed up

on the shipment to account for its loss.

The following two examples illustrate how the inadequate follow-up and

resolution of overdue shipments results in reported in-transit losses of

material.

In September 1996, the Defense Distribution Depot in Norfolk, Virginia,

issued 24 generators (valued at $212,640) to a commercial carrier for

shipment to a commercial repair contractor. According to NAVICP

Philadelphia officials, the repair contractor did not acknowledge receipt of

the material. Over 90 days later, in December 1996, the NAVICP requested

proof of issuance from the Norfolk depot, which the depot provided in

January 1997. In February 1997, the NAVICP sought proof of delivery from

the carrier, which did not confirm delivery. NAVICP officials said they did

not initiate a claim against the carrier. The material was later written off as

an in-transit loss.

In October 1995, the Norfolk depot reportedly issued 29 aircraft

guided-missile launchers (valued at over $181,830) to the Fleet and

Industrial Supply Center in San Diego, California. According to NAVICP

Philadelphia officials, the Center did not acknowledge receiving the

equipment. In February 1996, NAVICP sought proof of issuance from the

Norfolk depot, which it provided in April 1996. NAVICP Philadelphia officials

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said that they then unsuccessfully sought proof of receipt from the Center

from April to October 1996, when the items were written off as lost.

Purchased Material

Receipts Were Not

Monitored

NAVICP Philadelphia has not monitored the receipt of purchased material

from commercial sources. Under Navy policy, NAVICP must follow up with

the appropriate depot on receipts for purchased material 45 days from the

date of the shipment, and the depot must respond to NAVICP on the status

of the shipments. However, NAVICP Philadelphia officials told us that they

neither monitor shipments nor follow up on delinquent receipts. These

officials said they were unaware that NAVICP was required to initiate

follow-up on delinquent receipts. During our review, NAVICP Philadelphia

reported that in-transit purchased material totaled over $75 million, of

which $4.8 million in material had been in transit for over 1 year.

We judgmentally selected and reviewed records for 28 shipments (valued

at about $1 million) with outstanding purchased material balances over 

1 year old and found the following:

• Eight shipments (valued at $172,099) had been sent from commercial

vendors to end users over 1 year earlier, but NAVICP Philadelphia officials

had not attempted to follow up on delinquent receipt notifications to

determine whether the shipments had been received.

• NAVICP Philadelphia’s automated records indicated that six shipments of

purchased material (valued at $343,679) were in transit, but in fact there

were no such shipments. Instead, expenses of $343,679 had been incurred

to terminate the six contracts erroneously processed as outstanding

purchased material. According to Navy officials, the Defense Finance

Accounting Service disbursement system does not distinguish between

material and termination settlement payments, both of which accrue

purchased material.

• One shipment (valued at $26,566) reflected outstanding purchased

material in NAVICP Philadelphia’s automated financial records, but the

amount was in fact for internally generated progress payment expenditure

corrections.

• NAVICP Philadelphia’s automated records indicated that two shipments of

purchased material (valued at $38,750) were in transit, but in actuality

$38,750 was the difference between the estimated and final contract cost

of the two shipments.

• Eleven shipments (valued at $438,395) were received, but one of NAVICP

Philadelphia’s automated inventory records was not updated to reflect the

status of these shipments. According to NAVICP Philadelphia officials,

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receipts for the shipments were processed in their automated contract

status file but were not reflected in the procurement obligation status file.

Consequently, the established procurement remained on the NAVICP’s file

as outstanding purchased material. No effort had been made to reconcile

these 11 inconsistencies.

In May 1990, we reported discrepancies between NAVICP Philadelphia’s

purchased material shipment records and receipt records, a condition that

may adversely affect procurement decisions.11 We further reported that

these discrepancies indicated inadequate internal controls over procured

assets and did not provide NAVICP Philadelphia with reasonable assurance

that its procurement system was adequately protected from waste, fraud,

and abuse. In addition, the NAVICP Philadelphia, in its fiscal years 1995-98

management control reviews, cited ongoing problems with the systems

used to track purchased material.

In-Transit Inventory

Receipt and Follow-Up

Efforts Were Not Always

Monitored

NAVSUP and NAVICP Philadelphia have not always monitored warehoused

material receipt and follow-up efforts as required by Navy policy. The

policy requires periodic reviews of in-transit inventory losses to highlight

breakdowns in the physical distribution process and assist the NAVICP in

monitoring its performance. These reviews are also designed to give

NAVSUP a means of assessing the effectiveness of its policies and

procedures for governing in-transit inventory. Although NAVICP

Philadelphia compiles summary data on in-transit inventory losses, its

officials responsible for inventory accuracy acknowledged that they do not

compile data that identifies the predominant causes, sources, and

magnitude of in-transit inventory losses, even though the compilation of

such information is required by Navy policy. The lack of this information

impede’s the Navy’s ability to determine which activities are responsible

for lost or misplaced items. NAVSUP officials acknowledged that they had

not actively monitored in-transit inventory receipt and follow-up efforts

but had recently begun to review both systems and processes to correct

weaknesses.

The Federal Managers’ Financial Integrity Act of 1982 requires that agency

heads provide an annual statement to the President and Congress on

whether their agency’s internal control systems comply with the internal

control objectives of the act. If the agency head decides that agency

systems do not comply, a report identifying material weaknesses involved

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

1990).

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and the plans and schedules for correcting the weaknesses must be

submitted with the statement. The statement is also to include a report on

whether the agency’s accounting system conforms to the Comptroller

General’s standards. However, the Navy did not identify significant

weaknesses in internal controls over NAVICP’s in-transit inventory in its

Financial Integrity Act statements over the past 3 years, despite the fact

that it had written off as lost inventory valued at more than $3 billion.

Moreover, the Navy has not established any performance measures,

milestones, or timetables for reducing the risk of its in-transit inventory to

undetected theft or misplacement.

Internal Control

Weaknesses Undermine

Navy’s Ability to Meet

Results Act Requirements

The weaknesses in the Navy’s internal controls over in-transit inventory

undermine its ability to measure its progress toward achieving the goals

set out in DOD’s recent Performance Plan, covering fiscal year 1999,

prepared in response to the requirements of the Government Performance

and Results Act. DOD’s plan calls for improving asset visibility in such areas

as in-transit assets and sets up the goal to achieve 90-percent visibility over

material by 2000. Current Navy internal controls over in-transit inventory

do not provide a reliable means to establish visibility.12

Our review of items that the Navy had reported as being lost in transit

indicated that at least some had in fact been acknowledged as received. In

other cases, Navy officials wrote off in-transit inventory items because

they did not know whether the items had been stolen or otherwise lost. In

other words, they did not have adequate visibility over them. The lack of

adequate internal controls undermines the Navy’s ability to do its part in

helping DOD achieve a 90-percent visibility rate over inventories by 2000

and reduce inventories by 2003.13 The lack of controls may also limit the

ability of DOD and Navy officials to effectively manage the movement of

material and to make sound decisions about redistributing items rather

than buying new items or optimizing the positioning of stock.

DOD is also required by the Strom Thurmond National Defense

Authorization Act for Fiscal Year 1999 to develop a comprehensive plan to

ensure visibility over in-transit secondary items. For secondary items, the

law requires that DOD’s plan address such issues as the

12Asset visibility is intended to provide defense personnel with timely and accurate information on the

location, movement, status, and identity of units, personnel, equipment, and supplies across all DOD

components.

13In its plan, DOD also sets an indicator of reducing secondary item inventories to $48 billion by 2003.

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• vulnerability of in-transit items to loss through fraud, waste, and abuse;

• loss of oversight of in-transit items, including items transported by

commercial carriers; and

• loss of accountability over in-transit items due to either a delay of delivery

of the items or a lack of notification of the delivery.

The act called for DOD to submit its plan to Congress by March 1, 1999.

However, on March 4, 1999, DOD informed Congress that additional time

was necessary to prepare the plan due to, among other things, the broad

scope of the requirement and the need to thoroughly study our findings on

in-transit inventory. DOD stated that it intended to submit a comprehensive

plan to Congress by September 1, 1999.

Conclusions The Navy has not effectively controlled its in-transit inventory, leaving

significant amounts of inventory unaccounted for. Significant weaknesses

exist at all levels of the Navy’s in-transit inventory management structure.

These weaknesses lead to potential theft or undetected losses of items and

demonstrate inefficient and ineffective logistics management practices

such as potentially shipping or buying unnecessary inventory. These

weaknesses and the problems they create are primarily a result of the

failure of the Navy to follow its own policies and procedures regarding

controls of in-transit inventory. Further, significant problems exist in data

reporting systems.

Recommendations In conjunction with developing a statutorily required, comprehensive plan

to address visibility over in-transit inventory, DOD should take a number of

immediate steps to improve controls over the Navy’s in-transit inventory.

Specifically, we recommend that the Secretary of Defense direct the

Secretary of the Navy to do the following:

• Comply with existing DOD and Navy procedures regarding material receipt

acknowledgment of in-transit shipments and reemphasize follow-up

procedures on unconfirmed warehoused and purchased material receipts.

• Modify the Navy’s integrated accounting and logistics systems so that they

routinely update both financial and inventory records when in-transit

inventory items are received. Until the systems are operational, NAVICP

Philadelphia should establish routine reconciliation procedures for their

supply and financial records to ensure oversight and control over in-transit

inventory items.

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

• Specifically target in-transit inventory problems as an issue for review in

Federal Managers’ Financial Integrity Act assessments.

• Establish performance measures, milestones, and timetables to help

monitor the progress being made to reduce the vulnerability of in-transit

inventory to undetected loss or misplacement.

Agency Comments

and Our Evaluation

In written comments on a draft of this report, DOD agreed with all of our

recommendations and stated that the Navy had taken immediate steps to

improve in-transit inventory. The Commander, Naval Supply Systems

Command, has chartered an Integrated Process Team to review current

systems, policies, and processes to investigate material receipt

acknowledgment problems and proposed short-term solutions. The

Commander has also chartered a team to review in-transit practices of the

other services and of commercial activities in order to reengineer the

in-transit process. The Naval Inventory Control Point will include in-transit

inventory accounting as part of its fiscal year 1999 management control

evaluation of internal controls and report material weaknesses to NAVSUP

by August 1, 1999. DOD further stated that the Commander, Naval Supply

Systems Command, will establish performance measures and a plan of

action and milestones to monitor progress being made to reduce the loss

or misplacement of shipments.

Although DOD agreed with our recommendations, it stated that initial

research of the $3 billion in Navy inventory written off as lost supports its

belief that most of the material was actually received. A DOD official later

said that DOD’s belief was based on its review of 410 lost warehoused

material shipments at NAVICP Philadelphia in fiscal year 1997. According to

the official, DOD found that 327 (80 percent) of the 410 shipments had been

written off as lost even though they had been received.14 However, our

review at NAVICP Philadelphia indicated a different relationship between

shipments later accounted for and those actually lost. Our review showed

that 15 (16 percent) of the 94 warehoused shipments we sampled were

written off as lost despite the fact that their receipts were recorded and

that the Navy, after further investigation, could not account for the

whereabouts of the remaining 79 shipments.

Although some of the items reported as lost may actually be in the

inventory, DOD does not have an adequate system for determining that on

an item-by-item basis. Therefore, we continue to believe a significant

14No documentary evidence was available for us to validate this information. We asked the responsible

NAVSUP official for information about these 410 shipments and were told that this information was

based primarily on telephone calls and e-mail messages by the issuing activities to intended recipients.

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

number of items are vulnerable to undetected theft or loss. Moreover, until

this situation is resolved, these discrepancies reduce the reliability of DOD

inventory financial reports, thus obscuring true inventory losses and

misstating the number of items on hand.

We believe that the Navy’s planned and ongoing initiatives to address its

in-transit inventory deficiencies are a step in the right direction. However,

in conjunction with the steps taken to improve controls over the Navy’s

in-transit inventory, DOD needs to develop its plan for in-transit inventory

and bring it to fruition. DOD has recently indicated that it will take an

additional 6 months to develop the statutorily required, comprehensive

plan for its in-transit inventory. Because the act calls for us to review the

DOD plan and implementation, we will continue to monitor DOD’s efforts to

develop its overall plan and be in a position to assess its implementation.

Appendix I contains the scope and methodology for this report, and

appendix II contains additional details on Navy procedures for

acknowledging and following up on receipts of in-transit inventory. DOD’s

written comments on this report are reprinted in their entirety in 

appendix III.

As arranged with your offices, unless you publicly announce its contents

earlier, we plan no further distribution of this report until 30 days from its

issue date. At that time, we will send copies of this report to Senator

Daniel K. Inouye, Senator Joseph I. Lieberman, Senator Carl Levin, Senator

Ted Stevens, Senator Fred Thompson, and Senator John Warner and to

Representative Rod R. Blagojevich, Representative Dan Burton,

Representative Jerry Lewis, Representative John P. Murtha,

Representative Christopher Shays, Representative Ike Skelton,

Representative Floyd Spence, and Representative Henry A. Waxman in

their capacities as Chair or Ranking Minority Member, Senate and House

Committees and Subcommittees. We are also sending copies of this report

to The Honorable William S. Cohen, Secretary of Defense; The Honorable

Richard Danzig, Secretary of the Navy; Lieutenant General Henry T.

Glisson, Director, DLA; and The Honorable Jacob J. Lew, Director, Office of

Management and Budget. Copies will also be made available to others

upon request.

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

Please contact me at (202) 512-8412 if you have any questions. The major

contributors to this report are listed in appendix IV.

David R. Warren, Director

Defense Management Issues

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

Letter 1

Appendix I 

Scope and

Methodology

22

Appendix II 

Additional Details on

In-Transit Receipt

Acknowledgment and

Follow-Up Procedures

24

Appendix III 

Comments From the

Department of

Defense

28

Appendix IV 

Major Contributors to

This Report

32

Related GAO Products 33

Figures Figure 1: Reported Value of Navy-Owned In-transit Inventory

Losses by Inventory Control Point

5

Figure 2: Our Analysis of the Number of Lost Warehoused Items

Managed by NAVICP Philadelphia

6

Figure 3: Our Analysis of the Value of Warehoused Material

Losses Managed by NAVICP Philadelphia

7

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

Follow-up Procedures

25

Figure II.2: Warehoused Material Receipt Acknowledgment and

Follow-up Procedures

26

Figure II.3: Purchased Material Receipt Acknowledgment and

Follow-up Procedures

27

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

Abbreviations

DAAS Defense Automated Addressing System

DLA Defense Logistics Agency

DOD Department of Defense

GAO General Accounting Office

NAVICP Naval Inventory Control Point

NAVSUP Naval Supply Systems Command

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

Scope and Methodology

Our objectives for this report were to (1) identify the reported value and

types of inventory in transit within and between storage and repair

activities, vendors, and end users that were unaccounted for (or lost) and

(2) assess the Navy’s adherence to procedures for controlling such

in-transit inventory.

To assess the Navy’s procedures for controlling in-transit inventory and

identify the reported types and amounts of in-transit items that were not

accounted for, we took the following steps:

• We reviewed policies and procedures and obtained other relevant

documentation related to in-transit inventory from officials at the Defense

Logistics Management Standards Office, McLean, Virginia; the Defense

Automated Addressing System Office, Dayton, Ohio; and the Naval Supply

Systems Command (NAVSUP), Mechanicsburg, Pennsylvania.

• We obtained financial reports of in-transit losses between October 1995

and September 1998 at NAVSUP. Using the financial reports, we identified

the Naval Inventory Control Point (NAVICP) Philadelphia as the Navy’s

inventory control activity with the highest reported dollar value of

in-transit inventory losses. At NAVICP Philadelphia, we obtained

computerized inventory and financial records of in-transit losses between

October 1996 and September 1997, the most current and complete

in-transit information available. Using the data, we judgmentally selected

and reviewed 214 shipments of warehoused, purchased, and end-user

material, valued at $9 million, that were reported as lost or not received.

We did not independently verify the overall accuracy of NAVICP

Philadelphia’s databases from which we obtained data but used them as a

starting point for selecting shipments that we then tracked back to records

and documents on individual transactions.

• For each sample shipment, we reviewed available computer-generated

shipment and receipt data, analyzed inventory records, and held

discussions at the NAVICP Philadelphia, Pennsylvania; the Defense

Distribution Depot, Fleet and Industrial Supply Center, Norfolk Naval Air

Station, Norfolk, Virginia; and Oceana Naval Air Station, Virginia Beach,

Virginia. To learn whether issues associated with overdue shipments were

adequately resolved, we reviewed Department of Defense, Navy, and

NAVICP Philadelphia implementing guidance. Such information provided the

basis for conclusions regarding the controls over in-transit inventory. To

determine whether the Navy had emphasized in-transit inventory as part of

its assessment of internal controls, we reviewed assessments from NAVICP

Philadelphia for fiscal years 1995-97 and Navy Headquarters for fiscal

years 1995-97.

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

Scope and Methodology

We performed our review between February 1998 and January 1999 in

accordance with generally accepted government auditing standards.

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

Additional Details on In-Transit Receipt

Acknowledgment and Follow-Up

Procedures

Figure II.1 shows the procedures the Navy is to follow to acknowledge

receipts and to follow up on delinquent receipts for shipments of material

to end users, figure II.2 shows these procedures for shipments of

warehoused material, and figure II.3 shows the procedures for shipments

of purchased material.

Page 24 GAO/NSIAD-99-61 Defense Inventory
Appendix II 

Additional Details on In-Transit Receipt

Acknowledgment and Follow-Up

Procedures

Figure II.1: End-User Material Receipt

Acknowledgment and Follow-Up

Procedures

ICP

Directs shipment

Storage Activity

Ships material

ICP

Starts follow up

End user

Reports receipt?

Reports receipt? 5 day time standard Yes

End user

No

File

closed without receipt

confirmation

45 days from

date of shipping

15 days from

date of follow-up

No

Yes

3a

Receipt posted

 file closed

4

Receipt posted

file closed

30 days from

date of follow-up

1

2

3b

Page 25 GAO/NSIAD-99-61 Defense Inventory
Appendix II 

Additional Details on In-Transit Receipt

Acknowledgment and Follow-Up

Procedures

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

ICP

Directs shipment

Issuing Activity

●Storage activity

●Repair activity

Reports receipt?

Yes

Carrier

Ships material

No

5a

Receipt posted

file closed

Write

 off after

11 months

 Receiving Activity

●Storage activity

●Repair facility

ICP

Starts internal

follow-up

Identifies receipt?

Under threshold Over threshold

Write-off after

6 months

6a

Receipt posted

file closed

ICP

Seeks proof of

delivery

No

No

Yes

Yes

Yes

ICP

Seeks proof of receipt

Provides proof

 of receipt

Yes

No

1

2

3

4

5b

6

6b

Yes

ICP

Seeks proof of issue

Shipping Activity

Provides proof

of issue?

Carrier

Carrier

Provides proof of

delivery

Receiving Activity

Yes

Receipt

posted

 No

ICP starts

external follow-up

Page 26 GAO/NSIAD-99-61 Defense Inventory
Appendix II 

Additional Details on In-Transit Receipt

Acknowledgment and Follow-Up

Procedures

Figure II.3: Purchased Material Receipt

Acknowledgment and Follow-Up

Procedures

ICP

Starts follow-up

Storage Activity

Reports receipt?

Reports receipt?

Yes

Storage Activity

 No

(No procedures)

45 days after

shipment

No time standard

 No

Yes

4

Receipt posted

 file closed

ICP

Directs Shipment

Commercial Vendor

Ships material

1

2

3a

3b

4

Receipt posted

 file closed

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

Comments From the Department of Defense

Page 28 GAO/NSIAD-99-61 Defense Inventory
Appendix III 

Comments From the Department of Defense

Page 29 GAO/NSIAD-99-61 Defense Inventory
Appendix III 

Comments From the Department of Defense

Page 30 GAO/NSIAD-99-61 Defense Inventory
Appendix III 

Comments From the Department of Defense

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

Major Contributors to This Report

National Security and

International Affairs

Division, Washington,

D.C.

Charles I. Patton, Jr.

Lawson (Rick) Gist, Jr.

James R. Murphy

Norfolk Field Office Sandra F. Bell

Carleen C. Bennett

Paul A. Gvoth, Jr.

Joseph A. Murray

Jeanett H. Reid

Kansas City Field

Office

Robert C. Sommer

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

Performance and Accountability Series: Major Management Challenges

and Program Risks—Department of Defense (GAO/OCG-99-4, Jan. 1999).

Department of Defense: Financial Audits Highlight Continuing Challenges

to Correct Serious Financial Management Problems (GAO/T-AIMD/NSIAD-98-158,

Apr. 16, 1998).

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

1998).

Inventory Management: Vulnerability of Sensitive Defense Material to

Theft (GAO/NSIAD-97-175, Sept. 19, 1997).

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

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

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