Report to Congressional Requesters

United States General Accounting Office

GAO

July 2002 DEFENSE

INVENTORY

Air Force Needs to

Improve Control of

Shipments to Repair

Contractors

GAO-02-617
Page i GAO-02-617 Defense Inventory

Letter 1

Results in Brief 2

Background 3

Procedures to Control Shipped Inventory Are Not Being Followed

or Are Ineffective 5

Contractors Given Unrestricted Access to Government-Furnished

Material 5

Quarterly Shipment Reports Not Provided 6

Contractors Not Posting Government-Furnished and ManagerDirected Material Receipts 7

Contractors Not Reporting Shipment Discrepancies 9

Procedures for Following Up on Unconfirmed Material Receipts

Are Ineffective 10

Air Force Has Not Established Integrated Financial Management

System 11

Air Force Program Oversight Is Insufficient 12

Conclusions 12

Recommendations for Executive Action 13

Agency Comments and Our Evaluation 14

Appendix I Scope and Methodology 17

Appendix II Comments from the Department of Defense 20

Appendix III GAO Staff Acknowledgments 25

Related GAO Products 26

Tables

Table 1: Fiscal Year 2000 Shipments by Number, Value, and Type 4

Table 2: Types of Shipments in Fiscal Year 2000 4

Table 3: Status of Material Receipt, from GAO Review of Shipments

in Fiscal Year 2000 8

Contents
Page 1 GAO-02-617 Defense Inventory

July 1, 2002

The Honorable Richard J. Durbin

The Honorable Tom Harkin

United States Senate

The Honorable Peter A. DeFazio

The Honorable Carolyn B. Maloney

House of Representatives

This is one in a series of reports addressing defense inventory

vulnerabilities to fraud, waste, and abuse. (A list of related GAO products

appears at the end of this report.) Since at least 1990, our office has

considered Department of Defense inventory management to be a highrisk area because inventory management systems and procedures are

ineffective. A lack of control over inventory shipments increases their

vulnerability to undetected loss and theft and substantially increases the

risk that millions of dollars will be spent unnecessarily. In response to

your request, this report evaluates the Air Force’s inventory control

procedures for material shipped to contractors for repair or for use in

repair. Specifically, we assess the Air Force’s adherence to procedures

designed to safeguard this material.

The Air Force contracts with private companies (i.e., repair and

production contractors) to produce, maintain, and repair its equipment. In

some cases, the Air Force furnishes from its inventories some or all of the

parts necessary to perform the contracts. Control responsibility for this

material is the shared responsibility of the Air Force Materiel Command

and its three inventory control points, the Defense Logistics Agency, and

repair contractors. The Air Force Materiel Command administers the Air

Force’s supply system and provides management policies and procedures.

Through its three inventory control points, the command authorizes

inventory movement from Defense Logistic Agency storage depots1

 to

repair contractors. The Defense Logistics Agency—which operates and

manages 24 storage depots—receives, stores, and issues Air Force

inventory and maintains Air Force inventory records. In addition, the

Defense Contract Management Agency, through its property

administrators, assesses the accuracy of repair contractor records and

 1

 Air Force inventory is also issued to contractors from warehouses at Air Force bases.

United States General Accounting Office

Washington, DC 20548
Page 2 GAO-02-617 Defense Inventory

determines whether all government property is accounted for. Contractors

are responsible for establishing and maintaining systems to control,

protect, preserve, and maintain all government property.

To assess adherence to procedures, we examined shipments valued at

about $2.6 billion to the Air Force’s repair contractors in fiscal year 2000.

These shipments included classified, sensitive, pilferable, and unclassified

items.2

 We primarily focused our work at the three Air Force inventory

control points and 12 selected Air Force repair contractors (associated

with 14 repair contracts). More details about our scope and methodology

appear in appendix I.

The Air Force and contractor personnel have largely not complied with

Department of Defense and Air Force inventory control procedures

designed to safeguard material shipped to contractors, placing items worth

billions of dollars at risk of fraud, waste, and abuse. The following items

identify inadequate procedures and departures from required procedures:

• The Air Force’s three inventory control points have not restricted repair

contractors’ access to the specific items and quantities of governmentfurnished material3

 needed to accomplish the contract. This practice could

allow contractors to obtain unneeded and unauthorized material.

• The inventory control points have not sent quarterly reports on the status

of shipped material to property administration officials at the Defense

Contract Management Agency. Without the quarterly reports, these

officials cannot independently verify that contractors have accounted for

government-furnished material.

• Contractors receiving shipped material have not (1) properly entered the

receipt of shipments into their records and into the inventory control

points’ reporting systems or (2) routinely reported shipment

discrepancies. These failures impair the Air Force’s ability to account for

 2

 Classified items are those that require the highest degree of protection in the interest of

national security; sensitive items are those that require a high degree of protection and

control because of their high value and/or hazardous or technical nature; and pilferable

items have a ready resale value or a civilian application and are therefore especially subject

to theft.

3

 Government-furnished material is that which contractors requisition in support of repairs,

alterations, and modifications. Generally, this material is incorporated into or attached

onto deliverable end items (final products such as aircraft) or consumed or expended in

performing the contract.

Results in Brief
Page 3 GAO-02-617 Defense Inventory

shipments worth millions of dollars. Unaccounted-for inventory included

items that warrant a high degree of protection and control, such as circuit

card assemblies and navigation set control units.

• Air Force procedures for following up on shipments that contractors have

not confirmed as received are ineffective, leaving the exact status of the

shipments uncertain.

• The Air Force has not provided adequate program oversight because it

does not request and analyze data on contractor shipment discrepancies to

identify the extent and cause of discrepancies so that corrective action

may be taken. This lack of oversight impedes the Air Force’s ability to

improve its supply operations and to determine which activities are

responsible for lost or misplaced items.

We are recommending that the Secretary of Defense direct the Secretary

of the Air Force to improve compliance with existing procedures for

controlling shipped inventory and to improve the procedures themselves.

In written comments on a draft of this report, the Department of Defense

concurred with six recommendations, non-concurred with one

recommendation, and partially concurred with three recommendations.

The main point the Department makes is that it has corrected problems

with an automated internal control system for loading stock numbers and

quantities and screening them against contractor requisitions. Therefore,

we modified our recommendations, stating that the effectiveness of this

automated internal system must be demonstrated.

Inventory shipped for repair or in support of repairs typically involves the

following types of material:

• Manager-directed material, which item managers direct to be shipped to a

contractor for repair, alteration, or modification.

• Government-furnished material, which contractors requisition in support

of repairs, alterations, or modifications. Generally, this material is

incorporated into or attached onto deliverable end items (final products

such as aircraft) or consumed or expended in performing the contract.

For fiscal year 2000, Air Force logistics records for all inventory control

points showed the following number, value, and type of material had been

shipped to contractors (see table 1).

Background
Page 4 GAO-02-617 Defense Inventory

Table 1: Fiscal Year 2000 Shipments by Number, Value, and Type

Universe of shipments

Number of shipments Value

Manager-directed material 12,222 $2,371,663,119

Government-furnished material 9,222 $252,406,484

Total 21,444 $2,624,069,603

Source: Item Manager Wholesale Requisition Process System.

Table 2 shows a breakdown of all shipments to contractors in fiscal year

2000 by the security type, number of items, and dollar value of shipments.

Table 2: Types of Shipments in Fiscal Year 2000

Number of shipments Number of items Value

Classified military

items 7,110 57,920 $1,613,289,625

Sensitive items 1 48 50,884

Pilferable items 132 440 7,248,022

Nonsensitive items 13,491 102,767 944,960,004

Items with unknown

security classification 710 1,305 58,521,065

Total 21,444 162,480 $2,624,069,603

Source: GAO analysis.

Department of Defense (DOD) policy contains specific internal control

procedures to help ensure that shipped inventory is accounted for. When

an item is shipped, a shipping notification should be sent to the receiving

contractors. The intended recipient of the material is responsible for

notifying the inventory control point once the item has been received or if

a discrepancy exists (e.g., the item was not received or the quantity

received was less than expected). The notification of receipt and

discrepancy reporting processes are internal controls designed to account

for all shipped assets. If within 45 days of shipment the inventory control

point 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.
Page 5 GAO-02-617 Defense Inventory

As a result of departures from required procedures or ineffective

procedures, the Air Force’s shipped inventory is vulnerable to loss or theft.

First, the Air Force has allowed repair contractors access to governmentfurnished material not needed to fulfill the repair contract. Second,

inventory control points have not provided property administrators with

the required government-furnished material status reports to use in

verifying contractor records of government-furnished material received.

Third, contractors have not adequately recorded receipt of items and

reported receipt to inventory control points. Fourth, contractors have not

routinely reported discrepant shipments to the designated shipping

activity. Fifth, Air Force procedures for following up on shipments that

contractors have not confirmed as received are ineffective. Sixth, the Air

Force has not provided adequate oversight of shipments to contractors.

DOD requires inventory control points to establish one or more internal

control systems (i.e., management control activities) to restrict contractor

access to government-furnished material. Among other things intended,

the control systems are to screen all repair contractor requisitions for

validation and approval and to restrict contractor access to governmentfurnished material to the specific items and quantities listed in the repair

contract. However, the inventory control points’ systems generally screen

and restrict access to government-furnished material by a federal stock

class or stock group rather than by stock number and quantity.4

 Also, the

contracts we reviewed generally did not specify, as required, both the

items and the quantities of material that the inventory control points had

agreed to furnish to contractors.5

 As long as contractors requisition items

within an authorized federal stock class or stock group, governmentfurnished material is automatically provided whether or not it is needed to

fulfill the repair contract.

In a July 1997 memorandum, the Air Force Materiel Command reiterated

the requirement that the inventory control points screen all repair

contractor requisitions by stock number and quantity for validation and

 4

 Only 12 of the 14 contracts we reviewed authorized the contractors to requisition

government-furnished material. Of those 12 contracts, 9 are screened by federal stock class

or stock group rather than by stock number and quantity.

5

 Only 12 of the 14 contracts in our review authorized the contractor to requisition

government-furnished material. Of those 12 contracts, 8 did not specify both the items and

the quantities of material the inventory control points had agreed to furnish to contractors.

Procedures to Control

Shipped Inventory

Are Not Being

Followed or Are

Ineffective

Contractors Given

Unrestricted Access

to GovernmentFurnished Material
Page 6 GAO-02-617 Defense Inventory

approval, and it developed procedures for an automated method of loading

stock numbers and quantities into the control systems. Air Force officials

indicate that the major obstacle now is that the procedures for the

automated method of loading stock numbers do not work as designed. For

this reason, the Air Force Materiel Command waived the requirement for

screening by stock number and quantity and allowed inventory control

points to continue to screen contractor requisitions for governmentfurnished material at the federal stock class or stock group level.

The following example illustrates the weakness in the current screening

process. A contract we reviewed listed 14 specific, stock-numbered

parts—from seven different stock classes—that were required to repair

the end item (an electronic countermeasures system for the B-52H

aircraft). However, because the inventory control point’s system screened

and restricted the contractor’s access to government-furnished material by

federal stock class, the contractor could requisition any item from the

seven different stock classes in which the 14 parts are grouped. The seven

stock classes contain over 502,900 other stock-numbered parts that are not

needed to repair the end item. The contractor could requisition any of

these parts, in any quantity, and the improper requisition could pass

through the inventory control point’s screening system and be approved.

We did not determine whether contractors had obtained unauthorized

material as a result of their access to material by federal stock class or

group. However, these control weaknesses are the same as those

identified in earlier reports as having allowed contractors to obtain

unneeded and unauthorized material. For example, in a 1998 report on the

adequacy of government oversight over government-furnished material to

a contractor, the Air Force Audit Agency reported 2,978 of the 5,569

validated requisitions were not needed to accomplish the contract. The

unneeded requisitions included 1,090 stock numbers valued at $17.4

million. Similarly, a 1995 DOD inspector general report on management

access to the DOD supply system concluded that granting contractors

access to government-furnished material in the DOD supply system by

federal stock class continued to be a material internal control weakness

that placed DOD material at undue risk.

To independently verify that contractors have accounted for all

government-furnished material received, DOD policy requires inventory

control points to provide to property administrators at the Defense

Contract Management Agency quarterly status reports showing all

shipments of Air Force material to contractors. Inventory control point

Quarterly Shipment

Reports Not Provided
Page 7 GAO-02-617 Defense Inventory

officials responsible for distributing the reports to property administrators

told us that the reports have not been sent.

We found that existing Air Force procedures governing distribution of the

quarterly status reports do not assign responsibility for distributing these

reports to officials at inventory control points and are outdated (e.g., the

systems for generating the reports no longer exist). Air Force officials

acknowledge that the procedures are not current and stated that they are

in the process of updating them.

Proper distribution of government-furnished material status reports has

been a long-standing issue. For example, a 1995 Department of Defense

inspector general audit report on management access to the DOD supply

system stated that the Air Force should take the distribution of its status

report more seriously, ensuring that the report is issued each quarter. The

audit report asserts that property administrators are the last line of

defense in protecting material resources and, as such, they need an

independent record of the government-furnished material shipped to

contractors. The Air Force’s quarterly status report provides such a

record; without it, property administrators must rely entirely on

contractors’ records.

Department of Defense and Air Force policies contain specific procedures

governing the notifications that contractors should send to their inventory

control points when they receive shipped inventory. The policies state

that, upon receipt of an item, a receiving contractor must enter the

shipment into its inventory records and notify the inventory control point

of material receipt. To accomplish notification of receipt, the Air Force

requires contractors to enter receipts into a reporting system at the

appropriate inventory control point. The notification of receipt is an

internal control designed to account for all shipped assets.

During fiscal year 2000, the Air Force shipped thousands of items with a

reported value at about $2.6 billion to contractors. As part of our review,

we sought to determine whether items reportedly shipped to repair

contractors had in fact been received and entered into both the

contractors’ records and the inventory control points’ reporting systems.

Our review indicated that contractors are not following policies governing

receipt notification. Of the $2.6 billion of inventory shipped to contractors

in fiscal year 2000, we judgmentally selected and reviewed 9,003 items

valued at $814.2 million. We found that contractors had not always

Contractors Not

Posting GovernmentFurnished and

Manager-Directed

Material Receipts
Page 8 GAO-02-617 Defense Inventory

properly posted material receipts for these items into their records or into

the inventory control points’ reporting systems. Specifically, 48 percent of

these items had been received and properly posted by contractors to the

inventory control points’ reporting systems; 19 percent of the shipped

items had been received but were either improperly posted or not posted

by contractors to their records and/or the inventory control points’

reporting systems; and 33 percent of items reportedly had not been

received by contractors or lacked sufficient documentation to prove that

they had been accounted for by the contractors. The items unaccounted

for included those that warrant a high degree of protection and control

because of their high value and/or their security classification, such as

circuit card assemblies and navigation set control units. This lack of

documentation is in itself an internal control weakness. For example, the

federal acquisition regulation requires that contractors’ property control

records provide a complete, current, and auditable record of all

transactions involving government property. Table 3 presents more

detailed information on the items in our review.

Table 3: Status of Material Receipt, from GAO Review of Shipments in Fiscal Year 2000

Number of items Value

Shipment properly posted to the reporting system

Contractor received items and entered items into the reporting system using the correct

document number, stock number, and quantity 4,315 $247,510,461

Subtotal 4,315 247,510,461

Shipment improperly posted or not posted to reporting system but accounted for

Contractor received items but entered items into the reporting system using an incorrect

document number, stock number, and/or quantity 543 69,573,954

Contractor received item and entered item into inventory record, but it is not reflected in the

reporting system 1,096 436,277,575

Other 71 13,485,901

Subtotal 1,710 519,337,431

Shipment not posted and not accounted for

Contractors did not retain inventory records of shipment receipts or clearly document

receipt transactions 1,145 23,086,538

Contractor reportedly did not receive items 1,829 24,211,946

Other 4 9,739

Subtotal 2,978 47,308,224

Total 9,003 $814,156,116

Source: GAO analysis.

No dominant cause for these failures to properly account for shipment

receipts emerged in our discussions with contractor officials. However, in
Page 9 GAO-02-617 Defense Inventory

our interviews with contractor personnel, they identified a number of

factors:

• inadequate training/instruction on how to use and enter information into

the reporting system,

• lack of awareness of reporting procedures,

• data transmission problems (e.g., transactions entered by the contractors

did not show up in the reporting system),

• data input errors made while attempting to enter information into the

system, and

• data deleted from the reporting system because of data storage

constraints.

In addition, two contracts in our review did not contain a reporting

requirement.

Because of these reporting problems, the inventory control points’

reporting systems contained inaccurate information on large numbers of

shipment receipt notifications, thus reducing the value of the information

as a means of accurately and adequately accounting for all shipped assets.

Inventory control point personnel indicated that they are often forced to

work around the reporting systems, and they expend considerable time

and effort to collect, maintain, and analyze receipt information that should

be readily available to them in these automated systems. Visibility over

shipped material depends in part on accurate contractor reporting of

material receipts; without adequate reporting, the Air Force cannot readily

account for shipped material, making it vulnerable to theft or loss.

Air Force policy also requires contractors to notify the shipping activity if

a discrepancy exists between items shipped and items received. The

purpose of discrepancy reporting is to determine the cause of

discrepancies, effect corrective action, and prevent recurrence. Such

reports also provide (1) support for adjustment of property and financial

inventory accounting records, (2) information as a basis for claims against

contractors, and (3) information for management evaluations.

As table 3 shows, 1,829 of the items (valued at about $24.2 million) we

reviewed had reportedly not been received, but only 8 of the items were

reported as discrepancies and resolved. For the remaining 1,821 items, we

found a number of problems in discrepancy reporting.

Contractors Not

Reporting Shipment

Discrepancies
Page 10 GAO-02-617 Defense Inventory

• Contractor personnel did not report the discrepancies. According to most

contractor personnel, this situation occurred primarily because the

shipping activity did not notify them of impending shipments, thus they

did not expect the shipment and could not monitor its status. Others

indicated that they simply never report any discrepancies.

• Contractor personnel reported the discrepancies, but they did not route

the discrepancy reports to the appropriate shipping activity personnel who

could investigate and resolve the discrepancies. Although we found that

contractor personnel did not properly route shipping discrepancies to the

appropriate shipping activity, they were under the impression that they

had.

• Contractor personnel reported the discrepancies, but did not follow up

when no response was received from the shipping activity. They did not

follow up because they planned to reorder the material that they had not

received.

• Contractor personnel reported the discrepancies, but when they later

determined that the materials had been received, they did not cancel the

discrepancy reports.

This failure to comply with Air Force procedures undermines the Air

Force’s ability to determine the cause of discrepancies, effect corrective

action, and prevent recurrence. This situation can also result in loss of

control over material, lost recovery rights, and material remaining in a

questionable status for long periods of time.

To ensure proper reporting and accounting of material receipts, DOD

policy requires that inventory control points follow up with the contractor

within 45 days from the date of shipment if they have not been notified

that a shipment has arrived. 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.

At present, Air Force procedures do not ensure adequate follow-up on

unconfirmed receipts. According to Air Force officials, inventory control

points send electronic inquiries to contractors to follow up on all

shipments. However, the Air Force has not yet established a system by

which (1) the inventory control points can reconcile material shipped to

contractors with material received by contractors to determine

unconfirmed receipts and (2) contractors can respond to the follow-up

inquiries to confirm receipts or discrepancies. Consequently, inventory

control points assume that all material shipped to contractors is received

by them, and they close the record on the shipments without contractor

Procedures for

Following Up on

Unconfirmed Material

Receipts Are

Ineffective
Page 11 GAO-02-617 Defense Inventory

confirmation of material receipt. The inventory control point does not

become aware that material has not been received unless the contractor

inquires about the shipment. The result is a situation in which

unconfirmed receipts are officially considered delivered, an assumption

that, in turn, places this material at risk of fraud, waste, abuse, and theft.

The following example illustrates how the lack of adequate follow-up on

unconfirmed receipts places this material at risk. In June 2000, the

Defense Distribution Depot in Warner Robins, Georgia, reportedly issued

and delivered 85 electron tubes to an Air Force repair contractor, but,

according to contractor personnel, the shipment was never received and

the contractor never reported the discrepancy to the inventory control

point. In January 2002, we requested proof of issuance and delivery from

the Warner Robins depot. The depot provided proof of issuance but could

not confirm delivery. According to depot personnel, a delivery signature

was not obtained from the contractor’s receiving personnel at the time of

delivery. Nevertheless, the inventory control point closed the record on

this $3.5 million shipment, assuming the electron tubes had been received.

The electron tubes remain unaccounted for.

To address its deficiencies relating to proper reporting and accounting of

material receipts, the Air Force plans to transition to the Department of

Defense Commercial Asset Visibility System (CAV II). This will require a

2-year scheduled transition starting in fiscal year 2003 and ending in fiscal

year 2004.

Another weakness preventing effective accountability over shipped

inventory relates to the Air Force’s financial management system. The

Chief Financial Officers Act of 1990 requires a plan for the integration of

agency financial management systems. The Federal Financial Management

Improvement Act of 1996 built upon the 1990 act and required agencies to

maintain an integrated system (i.e., an integrated general ledger controlled

system). With such a system, accounting records and logistics records

(i.e., records from the supply and repair side of inventory control points)

should be updated automatically when inventory items are purchased and

received. Any differences between these two sets of records should be

identified periodically and research conducted to alert management at the

inventory control points to possible undetected loss or theft of shipped

items.

Air Force Has Not

Established an

Integrated Financial

Management System
Page 12 GAO-02-617 Defense Inventory

As part of the its latest efforts to reform its financial operations, the

Department of Defense has stated that it will develop Defense-wide

integrated systems.6

 If effectively designed and implemented, these

systems will be integral to ensuring effective accountability over the Air

Force’s shipped inventories.

To evaluate and improve supply operations and reporting performance,

Air Force policy requires shipping activities to record, summarize, and

report to Air Force headquarters the volume and dollar value of shipment

discrepancies, and headquarters is required to analyze this data to identify

the causes, sources, and magnitude of discrepancies so that corrective

actions can be taken. This policy is consistent with federal government

standards for internal controls that require ongoing oversight to assess the

quality of performance over time and to ensure that findings of audits and

other reviews are promptly resolved.

Air Force headquarters acknowledges that it has not requested nor

collected contractor shipment discrepancy data, and, as of February 2002,

had not developed a definite plan of action or a target date for full

implementation. The lack of program oversight may represent inadequate

management emphasis. Even if the Air Force were collecting the

contractor shipment discrepancy data, it would not be meaningful

because, as shown earlier, contractors are not reporting discrepancies

accurately. The lack of this information impedes the Air Force’s ability to

evaluate and improve supply operations as well as its ability to determine

which activities are responsible for lost or misplaced items.

Inventory worth billions of dollars has been vulnerable to fraud, waste,

and abuse because the Air Force either did not adhere to control

procedures or did not establish effective procedures. Because of these

control weaknesses, repair contractors have access to items and quantities

of items not specified in their contracts, and the Defense Contract

Management Agency does not have the quarterly reports on shipment

status that it needs to independently verify that contractors have

accounted for shipments of government-furnished material. In addition,

 6

 Under 10 U.S.C. 2222, the Department is to submit to the Congress an annual strategic

plan for improving financial management. The Department’s plan was submitted in January

2001.

Air Force Program

Oversight Is

Insufficient

Conclusions
Page 13 GAO-02-617 Defense Inventory

contractor receipt posting and discrepancy reporting practices produce

incomplete and inaccurate information, impairing the ability of the Air

Force to monitor shipments. Even if contractor records on shipment

receipts were accurate, the Air Force’s system cannot reconcile material

shipped to contractors with material received by contractors, so the Air

Force cannot readily identify shipments with unconfirmed receipts.

Consequently, the Air Force cannot readily account for these shipments,

which include classified, sensitive, and pilferable items. Finally, the Air

Force has not exercised the required extent of program oversight by

collecting data on contractor shipment discrepancies and using it to assess

practices for safeguarding shipped inventory; as a result, it cannot identify

the extent and cause of contractor shipment discrepancies or take

corrective action.

To improve the control of inventory being shipped, we recommend that

the Secretary of Defense direct the Secretary of the Air Force to undertake

the following:

• Improve processes for providing contractor access to governmentfurnished material by

• listing specific stock numbers and quantities of material in repair

contracts (as they are modified or newly written) that the inventory

control points have agreed to furnish to contractors;

• demonstrating that automated internal control systems for loading and

screening stock numbers and quantities against contractor requisitions

perform as designed;

• loading stock numbers and quantities that the inventory control points

have agreed to furnish to contractors into the control systems manually

until the automated systems have been shown to perform as designed;

and

• requiring that waivers to loading stock numbers and quantities

manually are adequately justified and documented based on costeffective and/or mission-critical needs.

• Revise Air Force supply procedures to include explicit responsibility and

accountability for

• generating quarterly reports of all shipments of Air Force material to

contractors; and

• distributing the reports to Defense Contract Management Agency

property administrators.

• Determine, for the contractors in our review, what actions are needed to

correct problems in posting material receipts.

Recommendations for

Executive Action
Page 14 GAO-02-617 Defense Inventory

• Determine, for the contractors in our review, what actions are needed to

correct problems in reporting shipment discrepancies.

• Establish interim procedures to reconcile records of material shipped to

contractors with records of material received by them, until the Air Force

completes the transition to its Commercial Asset Visibility system in fiscal

year 2004.

• Comply with existing procedures to request, collect, and analyze

contractor shipment discrepancy data to reduce the vulnerability of

shipped inventory to undetected loss, misplacement, or theft.

In written comments on a draft of this report (see app. II), the Department

of Defense concurred with six of the recommendations, non-concurred

with one recommendation, and partially concurred with three

recommendations. DOD did not concur with our second

recommendation—to improve processes for controlling contractor access

to government-furnished material by developing automated internal

control systems for loading stock numbers and quantities and screening

them against contractor requisitions. DOD states that the Air Force Special

Support Stock Control system already has the recommended capability in

place. Although the Air Force Special Support Stock Control system may

be capable of loading stock numbers and quantities and screening them

against contractor requisitions, we found that in practice the system was

not able to carry out this function as designed. A January 2002 software

change implemented to address the issue did not resolve it, and Air Force

officials acknowledged in April 2002 that this system was still not working

properly. To correct the weakness in its current automated internal

control systems, Air Force officials stated that in April 2002 the Air Force

Materiel Command planned to revise its existing procedures for an

automated method of loading stock numbers into the current control

systems. We believe that the Air Force’s actions to correct its internal

control systems deficiencies are a step in the right direction, and, if the

revised procedures do work as designed, they will improve the process for

controlling contractor access to government-furnished material. Based on

DOD’s comments, we modified our recommendation to emphasize the

need to demonstrate that automated internal control systems for loading

and screening stock numbers and quantities against contractor

requisitions perform as designed.

DOD partially concurred with the recommendation to load stock numbers

and quantities for items requisitioned by contractors into the control

systems manually until the automated system is implemented. DOD again

stated that the Air Force Materiel Command’s current control systems

Agency Comments

and Our Evaluation
Page 15 GAO-02-617 Defense Inventory

already provide the capability for loading and screening national stock

numbers and quantities against contractor requisitions. However, DOD

directed the Air Force to determine the feasibility of establishing an

interim capability until all repair contracts are written in compliance with

Air Force policies and procedures. We continue to believe our

recommendation will be valid until the previously discussed automated

internal control system for loading stock numbers and quantities and

screening them against contractor requisitions is proven to work as

designed.

DOD partially concurred with the recommendation to require that waivers

to loading stock numbers and quantities manually are adequately justified

and documented based on cost-effective and/or mission-critical needs.

DOD reiterated that the current Air Force control systems already provide

the capabilities for loading stock numbers and quantities and screening

them against contractor’s requisitions. DOD further states that it will

direct Headquarters, Air Force Installations and Logistics, to ensure that

future decisions affecting validation of contractor orders involving

government-furnished materiel or equipment are based on costeffectiveness and/or mission-critical needs and that requests are processed

in accordance with DOD policies and procedures. We agree with DOD that

any future waivers should be justified and documented. However, we

continue to believe our recommendation will be valid until the waiver is

rescinded, because the waiver allows for the inventory control point to

continue to load and screen contractor requisitions at the federal stock

class or stock group levels rather than loading contracts at the required

national stock number level.

Finally, DOD partially concurred with the recommendation to comply with

existing procedures to request, collect, and analyze contractor shipment

discrepancy data to reduce the vulnerability of shipped inventory to

undetected loss, misplacement, or theft. DOD stated that in February 2001,

Headquarters, Air Force Installations and Logistics, directed all Air Force

major commands to collect and analyze these types of supply

discrepancies for possible trends. DOD added that each major command

was tasked to provide Air Force Installations and Logistics a semi-annual

report of its findings (negative reports were not required). DOD recently

directed Headquarters, Air Force Installations and Logistics, to reemphasize this requirement to all major commands and to require that all

major commands submit a report on their findings for the last 12 months.

Moreover, a negative report will be required if no supply discrepancies

were received. While we believe this is a step in the right direction, we

also believe the DOD response to our recommendation does not address
Page 16 GAO-02-617 Defense Inventory

the contractor discrepancy reporting issues raised in this report. Although

some Air Force major commands may actually be collecting and analyzing

shipment discrepancies at their Air Force bases, we found that similar

contractor shipment discrepancy data has not been requested nor

collected. As we stated in this report, Air Force headquarters

acknowledges that it has neither requested nor collected these contractor

discrepancy report data for shipments, and, as of February 2002, had not

developed a definite plan of action or a target date for full implementation.

We continue to believe the conditions we reported on and our

recommendation are still valid and should be addressed by DOD. Based on

DOD’s comments, we have made it clear that the shipment discrepancy

data referred to in this report and in the related recommendation was

provided by the contractors.

Appendix I contains the scope and methodology for this report. DOD’s

written comments on this report are reprinted in their entirety in

appendix II.

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

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

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

appropriate congressional committees; the Secretary of Defense; the

Secretary of the Air Force; the Director, Office of Management and

Budget; and the Director, Defense Logistics Agency. We will also make

copies available to others upon request.

Please contact me at (202) 512-8412, or Lawson Gist, Jr. (202) 512-4478, if

you or your staff have any questions concerning this report. Other GAO

staff acknowledgments are listed in appendix III.

David R. Warren

Director

Defense Capabilities and Management
Appendix I: Scope and Methodology

Page 17 GAO-02-617 Defense Inventory

To assess the Air Force’s and its repair contractors’ adherence to

procedures for controlling shipped inventory, we took the following steps:

• To identify criteria for controlling shipped inventory, we reviewed

Department of Defense and Air Force policies and procedures, obtained

other relevant documentation related to shipped inventory, and discussed

inventory management procedures with officials at the following

locations: Headquarters, Department of the Air Force, Washington, D.C.;

the Air Force Materiel Command, Wright-Patterson Air Force Base, Ohio;

the Oklahoma City Air Logistics Center, Tinker Air Force Base, Oklahoma;

the Ogden Air Logistics Center, Hill Air Force Base, Utah; the Warner

Robins Air Logistics Center, Robins Air Force Base, Georgia; the Defense

Contract Management Agency, Alexandria, Virginia; and the Defense

Logistics Management Standards Office, Fort Belvoir, Virginia.

• To identify the number, value, and types of shipped inventory, we obtained

computerized supply-side records of all government-furnished material

shipments and manager-directed material shipments between October

1999 and September 2000 from the Air Force Materiel Command at WrightPatterson Air Force Base, Ohio. The records contained descriptive

information about each shipment, including the document number,

national stock number, and quantity shipped. We excluded broken items

shipped from end-user activities to contractor repair facilities and repaired

material returned from a contractor repair facility to a storage activity or

end user because the Air Force Materiel Command could not readily

identify and provide the descriptive information. To determine the security

type of selected shipments in fiscal year 2000, we identified the national

stock number for all shipments of government-furnished material and

manager-directed material. We then matched the national stock number

with security classification codes in the Department of Defense Federal

Logistics Information System.

• To select contractors and items shipped to them, we used computerized

shipment data obtained from the Air Force Materiel Command. To develop

our methodology, we conducted a preliminary review using three

judgmentally selected contractors; two contractors were chosen on the

basis of their proximity to the inventory control points, and the third was

selected because of the substantial volume of shipments between it and all

of the inventory control points. For these initial contractors, we selected

214 government-furnished material items and 1,159 manager-directed

material items, based on such factors as the national stock number of the

items and the number of items and/or dollar value of the shipments.

Subsequently, we judgmentally selected an additional nine repair

contractors, three for each inventory control point, that had either the

largest dollar value or the largest number of government-furnished and

Appendix I: Scope and Methodology
Appendix I: Scope and Methodology

Page 18 GAO-02-617 Defense Inventory

manager-directed items shipped to them. For these contractors, we then

selected 188 government-furnished material items and 7,442 managerdirected material items based on the military sensitivity of the items in the

shipments and the unit price and/or dollar value of the shipments. Because

the number of selected contractors and shipments was limited and

judgmentally selected, the results of our analysis cannot be projected to all

Air Force repair contractors and shipments.

• To assess whether shipments had been received and entered into the

inventory control points’ repair-side reporting system, we obtained from

the inventory control points their computer-generated shipment receipt

histories. The receipt histories contained descriptive information about

each shipment, including the document number, national stock number,

and quantity reported as received.

• We did not independently verify the overall accuracy of the databases for

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. Because our conclusions are based only on those

shipments for which we tracked back to documents, use of this data is

reasonable for our purposes.

• To determine whether contractors had accounted for our selected

shipments, we then matched the Air Force Materiel Command supply-side

records of shipments to inventory control points’ repair-side receipt

histories. When we identified discrepancies, we followed up with the

repair contractors and inventory control points by tracking items back to

contractor inventory records and by holding discussions with officials at

the following locations: BAE Flight Systems, Mojave, California; Boeing,

San Antonio, Texas; Boeing Electronic Systems, Heath, Ohio; Heroux, Inc.,

Quebec, Canada; ITT Avionics, Clifton, New Jersey; Lockheed Martin,

Marietta, Georgia; Lockheed Martin, San Antonio, Texas; Lockheed Martin

Lantirn, Warner Robins, Georgia; Northrop Grumman, Baltimore,

Maryland; Northrop Grumman, Warner Robins, Georgia; PEMCO

Aeroplex, Birmingham, Alabama; Teledyne Electronic Technologies,

Warner Robins, Georgia; and the Defense Distribution Depots (located in

Warner Robins, Georgia, and Oklahoma City, Oklahoma).

• To determine what happened to selected items that had reportedly not

been received by contractors, our Office of Special Investigations followed

up with commercial carriers by obtaining proof of delivery information

and by holding discussions with officials at the following locations: ABF

Freight Systems, Inc., Fort Smith, Arkansas; Associated Global Systems,

Inc., New Hyde Park, New York; CorTrans Logistics, LLC, Wooddale,

Illinois; Emery Worldwide, Ontario, California; Federal Express

Corporation, Somerset, New Jersey; and United Parcel Service,

Washington, D.C.
Appendix I: Scope and Methodology

Page 19 GAO-02-617 Defense Inventory

• To learn whether issues associated with unaccounted-for shipments were

adequately resolved, we reviewed Department of Defense, Air Force, and

Air Force Materiel Command implementing guidance. Such information

provided the basis for conclusions regarding the adherence to procedures

for controlling shipped inventory.

• To determine whether the Air Force had emphasized shipped inventory as

part of its assessment of internal controls, we reviewed assessments from

the Department of the Air Force, the Oklahoma City Air Logistics Center,

the Ogden Air Logistics Center, and the Warner Robins Air Logistics

Center for fiscal years 1999 and 2000.

Our work was performed from May 2001 through April 2002 in accordance

with generally accepted government auditing standards. We conducted our

other investigative work during March 2002 and April 2002 in accordance

with investigative standards established by the President’s Council on

Integrity and Efficiency.
Appendix II: Comments from the Department

of Defense

Page 20 GAO-02-617 Defense Inventory

Appendix II: Comments from the Department

of Defense
Appendix II: Comments from the Department

of Defense

Page 21 GAO-02-617 Defense Inventory
Appendix II: Comments from the Department

of Defense

Page 22 GAO-02-617 Defense Inventory
Appendix II: Comments from the Department

of Defense

Page 23 GAO-02-617 Defense Inventory
Appendix II: Comments from the Department

of Defense

Page 24 GAO-02-617 Defense Inventory
Appendix III: GAO Staff Acknowledgments

Page 25 GAO-02-617 Defense Inventory

Key contributors to this report include Sandra F. Bell, George Surosky,

Susan Woodward, Jay Willer, David Fisher, Norman M. Burrell, and John

Ryan.

Appendix III: GAO Staff Acknowledgments

Acknowledgments
Related GAO Products

Page 26 GAO-02-617 Defense Inventory

Performance and Accountability Series: Major Management Challenges

and Program Risks—Department of Defense. GAO-01-244. Washington,

D.C.: January 2001.

High-Risk Series: An Update. GAO-01-263. Washington, D.C.: January

2001.

Defense Inventory: Plan to Improve Management of Shipped Inventory

Should Be Strengthened. GAO/NSIAD-00-39. Washington, D.C.: February

22, 2000.

Department of the Navy: Breakdown of In-Transit Inventory Process

Leaves It Vulnerable to Fraud. GAO/OSI/NSIAD-00-61. Washington, D.C.:

February 2, 2000.

Defense Inventory: Property Being Shipped to Disposal Is Not Properly

Controlled. GAO/NSIAD-99-84. Washington, D.C.: July 1, 1999.

DOD Financial Management: More Reliable Information Key to

Assuring Accountability and Managing Defense Operations More

Efficiently. GAO/T-AIMD/NSIAD-99-145. Washington, D.C.: April 14, 1999.

Defense Inventory: DOD Could Improve Total Asset Visibility Initiative

With Results Act Framework. GAO/NSIAD-99-40. Washington, D.C.: April

12, 1999.

Defense Inventory: Navy Procedures for Controlling In-Transit Items

Are Not Being Followed. GAO/NSIAD-99-61. Washington, D.C.: March 31,

1999.

Performance and Accountability Series: Major Management Challenges

and Program Risks—Department of Defense. GAO/OCG-99-4.

Washington, D.C.: January 1999.

High-Risk Series: An Update. GAO/HR-99-1. Washington, D.C.: January

1999.

Department of Defense: Financial Audits Highlight Continuing

Challenges to Correct Serious Financial Management Problems. GAO/TAIMD/NSIAD-98-158. Washington, D.C.: April 16, 1998.

Department of Defense: In-Transit Inventory. GAO/NSIAD-98-80R.

Washington, D.C.: February 27, 1998.

Related GAO Products
Related GAO Products

Page 27 GAO-02-617 Defense Inventory

Inventory Management: Vulnerability of Sensitive Defense Material to

Theft. GAO/NSIAD-97-175. Washington, D.C.: September 19, 1997.

Defense Inventory Management: Problems, Progress, and Additional

Actions Needed. GAO/T-NSIAD-97-109. Washington, D.C.: March 20, 1997.

High-Risk Series: Defense Inventory Management. GAO/HR-97-5.

Washington, D.C.: February 1997.

High-Risk Series: Defense Financial Management. GAO/HR-97-3.

Washington, D.C.: February 1997.

(350079)

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