a

GAO

United States Government Accountability Office

Report to Congressional Requesters

July 2004 DEFENSE 

INVENTORY

Navy Needs to 

Improve the 

Management Over 

GovernmentFurnished Material 

Shipped to Its Repair 

Contractors

GAO-04-779
www.gao.gov/cgi-bin/getrpt?GAO-04-779.

To view the full product, including the scope 

and methodology, click on the link above. 

For more information, contact William M. Solis 

at (202) 512-8412 or solisw@gao.gov. 

Highlights of GAO-04-779, a report to the 

Honorable Richard J. Durbin and the 

Honorable Tom Harkin, U.S. Senate; and 

the Honorable Peter A. DeFazio and the 

Honorable Carolyn B. Maloney, House of 

Representatives. 

July 2004

DEFENSE INVENTORY

Navy Needs to Improve the Management 

Over Government-Furnished Material 

Shipped to Its Repair Contractors 

The Naval Inventory Control Point and its repair contractors have not 

followed DOD and Navy inventory management control procedures intended 

to provide accountability for and visibility of shipped government-furnished 

material to Navy repair contractors. As a result, Navy inventory worth 

millions of dollars is vulnerable to fraud, waste, or abuse. First, Navy repair 

contractors are not acknowledging receipt of government-furnished material 

from the Navy’s supply system. Although a DOD procedure states that 

contractors will notify the military services’ inventory control points once 

material is received, Naval Inventory Control Point officials are not requiring 

its repair contractors to do so. Consequently, the Naval Inventory Control 

Point is not adhering to another DOD procedure that requires the military 

services to follow up with repair contractors within 45 days when the 

receipts for items are not confirmed. Naval Inventory Control Point officials 

stated that receipting for government-furnished material, which is 

earmarked for immediate consumption in the repair of another item, might 

overstate the inventory levels in their inventory management system. 

Without material receipt notification, the Naval Inventory Control Point 

cannot be assured that its repair contractors have received the material. For 

fiscal year 2002, the most recent and complete data available at the time of 

GAO’s review, the Naval Inventory Control Point reported that 4,229 

government-furnished material shipments (representing 4,301 items value at 

approximately $115 million) had been shipped to its repair contractors. GAO 

randomly selected and examined 308 government-furnished material 

shipments, representing 344 items that were shipped to the Navy’s repair 

contractors. Based on this random sample, GAO estimated that 50 

unclassified items may be unaccounted for, with a value of about $729,000 in 

aircraft-related government-furnished material. 

Additionally, the Naval Inventory Control Point does not send quarterly 

reports on the status of government-furnished material shipped to its repair 

contractors to the Defense Contract Management Agency. DOD and Navy 

procedures require that the Naval Inventory Control Point generate and 

distribute quarterly reports on government-furnished material shipped to 

repair contractors, including information on total shipments and their dollar 

value, number of shipments for which receipts are unknown, and rejected 

requisitions to the Defense Contract Management Agency. Although there 

are a number of DOD and Navy procedures that outline this reporting 

requirement, the Naval Inventory Control Point officials responsible for 

implementing this procedure were unaware of the requirement. The Naval 

Inventory Control Point lacks procedures to ensure that these reports are 

generated and distributed to the Defense Contract Management Agency. 

Without the reports, the Defense Contract Management Agency may be 

unable to independently verify that the Navy repair contractors have 

accounted for all government-furnished material shipped to them. 

GAO has reported in a number of 

products that the lack of control 

over inventory shipments increases 

vulnerability to undetected loss or 

theft and substantially increases 

the risk that million of dollars can 

be spent unnecessarily. This report 

evaluates the Navy’s and its repair 

contractors’ adherence to 

Department of Defense (DOD) and 

Navy inventory management 

control procedures for 

government-furnished material 

shipped to Navy repair contractors. 

Government-furnished material 

includes assemblies, parts, and 

other items that are provided to 

contractors to support repairs, 

alterations, and modifications. 

Generally, this material is 

incorporated into or attached onto 

deliverable end items, such as 

aircraft, or consumed or expended 

in performing a contract. 

GAO recommends that the Navy 

require its repair contractors to 

acknowledge receipt of 

government-furnished material, 

follow up on unconfirmed material 

receipts within the established 45 

days, and implement procedures to 

ensure that quarterly reports of 

government-furnished material 

shipped to repair contractors are 

generated and distributed to the 

Defense Contract Management 

Agency. DOD concurred with 

GAO’s recommendations and 

provided estimated timelines for 

implementation of each of the 

recommendations. 
Page i GAO-04-779 Defense Inventory 

Letter 1

Results in Brief 3

Background 5

Inventory Management Control Procedures Are Not Being 

Followed 8

Conclusion 12

Recommendations for Executive Action 12

Agency Comments 13

Appendix I Scope and Methodology 14 

Appendix II Comments from the Department of Defense 17 

Appendix III GAO Contact and Staff Acknowledgments 20 

Related GAO Products 21 

Table 

Table 1: Fiscal Year 2002 Government-Furnished Material 

Shipments by Number and Value 6

Contents 

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reproduce this material separately. 
Page 1 GAO-04-779 Defense Inventory 

July 23, 2004 

The Honorable Richard J. Durbin 

The Honorable Tom Harkin 

United States Senate 

The Honorable Peter A. DeFazio 

The Honorable Carolyn B. Maloney 

House of Representatives 

As we have reported in a number of our products, the lack of control over 

inventory shipments increases vulnerability to undetected loss or theft and 

substantially increases the risk that millions of dollars will be spent 

unnecessarily. Since at least 1990, we have considered Department of 

Defense (DOD) inventory management to be a high-risk area because 

inventory management systems and procedures are ineffective. (A list of 

related GAO products appears at the end of this report.) 

In July 2002, we reported on the Air Force’s noncompliance with inventory 

management control procedures that led to inventory worth billions of 

dollars being vulnerable to fraud, waste, or abuse.1

 In response to your 

request for us to review the Navy and Army inventory management 

procedures for controlling inventory shipped to repair contractors, we 

evaluated the Navy’s and its repair contractors’ adherence to DOD and 

Navy inventory management control procedures for government-furnished 

material2

 shipped to Navy repair contractors. As agreed with your offices, 

we plan to initiate a review of the Army’s and its repair contractors’ 

adherence to DOD and Army inventory management control procedures 

for shipped government-furnished material, as well as items for repair that 

are provided to Army repair contractors. 

 1

 U.S. General Accounting Office, Defense Inventory: Air Force Needs to Improve Control 

of Shipments to Repair Contractors, GAO-02-617 (Washington, D.C.: July 1, 2002). 

2

 Government-furnished material is material in the possession of, or acquired by, the 

government and later delivered or otherwise made available to a contractor. It includes 

assemblies, components, parts, raw and process material, and small tools and supplies that 

contractors use in support of repairs, alterations, and modifications. Generally, this 

material is incorporated into or attached onto deliverable end items, such as aircraft, or 

consumed or expended in performing a contract. Additional details regarding how the Navy 

further defines government-furnished material are included in appendix I. 

United States Government Accountability Office

Washington, DC 20548 
Page 2 GAO-04-779 Defense Inventory 

The Navy contracts with private companies (i.e., repair and production 

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

cases, the Navy furnishes the material necessary to perform the repairs at 

the contractors’ locations. Responsibility for controlling this material is 

shared among the Naval Supply Command, the Naval Inventory Control 

Point, the Defense Logistics Agency, repair contractors, and the Defense 

Contract Management Agency. The Naval Supply Command administers 

the Navy’s supply system and provides inventory management policies and 

procedures. The Naval Inventory Control Point procures, manages, and 

supplies inventory for naval aircraft, submarines, and ships worldwide.3

The Defense Contract Management Agency assesses the accuracy of repair 

contractor records and accounts for all government property furnished to 

a contractor.4

Our objective was to determine whether the Naval Inventory Control Point 

and its repair contractors adhere to DOD and Navy inventory management 

control procedures governing the accountability for and visibility of 

shipped government-furnished material. We did not review the Navy 

inventory management control procedures for items needing repair that 

are provided to Navy contractors because of a recent June 2003 DOD 

Office of the Inspector General report.5

 While the Inspector General’s 

report indicated that the Navy had taken actions to improve its procedures 

and controls to account for these items at commercial repair facilities, it 

found that additional improvements were needed to improve the 

monitoring and oversight of shipped inventory.6

To assess the Naval Inventory Control Point’s and its repair contractors’ 

adherence to DOD and Navy inventory management control procedures 

 3

 The Naval Inventory Control Point serves as the Management Control Activity for the 

Navy Supply Command. The Management Control Activity is a Navy activity or DOD 

activity delegated by the Navy that is responsible for validating all requisitions for 

government-furnished material shipped to contractors. The Management Control Activity is 

also responsible for submitting government-furnished material status reports to the 

Defense Contract Management Agency. 

4

 The Defense Contract Management Agency property administrators are charged with 

carrying out this responsibility. 

5

 Department of Defense Office of the Inspector General, Logistics: Followup Audit of 

Depot-Level Repairable Assets at Selected Army and Navy Organizations, D-2003-098 

(Arlington, Virginia: June 5, 2003). 

6

 Until the inventory reaches its intended destination, the Naval Inventory Control Point 

refers to it as in-transit, which is also referred to as shipped inventory. 
Page 3 GAO-04-779 Defense Inventory 

related to government-furnished material shipped to repair contractors, 

we randomly selected and examined 308 government-furnished material 

shipments. These shipments represented 344 items that were shipped to 

Navy repair contractors in fiscal year 2002, the most recent and complete 

data available at the time of our review. We sent surveys to 29 Navy repair 

contractors requesting data on these unclassified, classified, and sensitive 

shipments valued at about $11.9 million.7

 We received survey responses 

from 20 of the 29 contractors, representing 207 government-furnished 

material shipments (corresponding to 243 items). Our review focused on 

the Naval Inventory Control Point facility located in Philadelphia, 

Pennsylvania, which manages aircraft-related inventory.8

 We assessed the 

reliability of the data used in this report and determined that the data were 

sufficiently reliable for our purposes. 

We conducted our review from March 2003 through April 2004 in 

accordance with generally accepted government auditing standards. 

More details about our scope and methodology appear in appendix I. 

The Naval Inventory Control Point and its repair contractors have not 

followed DOD and Navy procedures intended to provide the accountability 

for and visibility of inventory shipped to Navy repair contractors. 

Specifically, Navy repair contractors are not routinely acknowledging 

receipt of government-furnished material received from the Navy. A DOD 

procedure requires repair contractors to acknowledge receipt of 

government-furnished material9

 that has been shipped to them from the 

Navy’s supply system.10 However, Naval Inventory Control Point officials 

are not requiring repair contractors to acknowledge receipt of 

government-furnished material that they have received from this system. 

By not requiring repair contractors to acknowledge receipt of governmentfurnished material, the Naval Inventory Control Point has also departed 

 7

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

national security. Sensitive items—those that are high value, highly technical, or hazardous 

in nature and small arms, ammunition, explosives, and demolition material—require a high 

degree of protection and control due to statutory requirements or regulations. 

8

 Hereafter referred to as Naval Inventory Control Point. 

9

 DOD 4000.25-2-M, Military Standard Transaction Reporting and Accounting Procedures 

(MILSTRAP), September 2001 (as amended by changes 1&2), paragraph C6.6. 

10 For purposes of this report, the Navy’s supply system refers to inventory stored at and 

shipped from Navy warehouses, contractor facilities, and manufacturer facilities. 

Results in Brief 
Page 4 GAO-04-779 Defense Inventory 

from the procedure to follow up with the contractor within 45 days when 

the contractor fails to confirm receipt for an item.11 Without material 

receipt notification, the Naval Inventory Control Point cannot be assured 

that its repair contractors have received the shipped material. This failure 

to acknowledge receipt of material shipped to repair contractors can 

potentially impair the Navy’s ability to account for shipments leading to 

possible fraud, waste, or abuse. For fiscal year 2002, the most recent and 

complete data available at the time of our review, the Naval Inventory 

Control Point reported that 4,229 government-furnished material 

shipments had been shipped to its repair contractors. These shipments 

had a value of approximately $115 million. We randomly selected and 

examined 308 government-furnished material shipments, valued at 

approximately $11.9 million, and surveyed 29 Navy repair contractors to 

determine if they had recorded receipts for these shipments in their 

property records. The Navy repair contractors had documented receipts 

for all classified shipments. However, they were unable to document the 

receipts for 4 of the unclassified shipments (representing 4 items) in our 

sample. Because our sample was randomly selected, it was estimated that 

50 unclassified items may be unaccounted for, with a value of about 

$729,000 in inventory of aircraft-related government-furnished material for 

fiscal year 2002.12

Additionally, the Naval Inventory Control Point does not send quarterly 

reports on the status of shipped material to the Defense Contract 

Management Agency. DOD and Navy procedures require that the Naval 

Inventory Control Point generate quarterly reports on governmentfurnished material shipped to repair contractors, including information on 

total shipments and their dollar value, number of shipments for which 

receipts are unknown, and rejected requisitions to the Defense Contract 

Management Agency.13 However, the Naval Inventory Control Point does 

not have procedures in place to ensure that these quarterly reports are 

 11 DOD 4000.25-2-M, Military Standard Transaction Reporting and Accounting 

Procedures (MILSTRAP), September 2001 (as amended by changes 1&2), paragraph C6.7. 

12 This is the mean value based on our analysis. We are 95 percent confident that between 4 

and 98 items are unaccounted for with a value of between $58,300 and $1,428,350. 

13 DOD 4140.1-R, DoD Supply Chain Materiel Management Regulation, May 23, 2003, 

paragraph C5.11.2.4; DOD 4161.2-M, DoD Manual for the Performance of Contract 

Property Administration, December 1991, paragraph C5.2.6; and SECNAVINSTR 

4440.32A, Control of Contractor Access to DoD Material Inventories and Determinations 

for the Supply of Government Furnished Material, September 27, 1991, paragraph 

6d(5)(b). 
Page 5 GAO-04-779 Defense Inventory 

generated and distributed to the Defense Contract Management Agency. 

Without these reports, the Defense Contract Management Agency may be 

unable to conduct an independent verification that the Navy repair 

contractors have accounted for all government-furnished material shipped 

to them. 

We are making three recommendations to strengthen the Navy’s 

compliance with existing inventory management procedures for 

controlling government-furnished material shipped to its repair 

contractors. In written comments on a draft of this report, DOD concurred 

with our recommendations and provided estimated timelines for 

implementation of each of the recommendations. 

The Naval Inventory Control Point authorizes movement of its inventory 

from the Defense Logistic Agency,14 Navy-managed shipping and receiving 

activities, and Navy repair contractors. With prior approval from Naval 

Inventory Control Point item managers, Navy repair contractors can also 

use material located at their facilities. DOD procedures and Federal 

Acquisition Regulation procedures generally require that repair 

contractors establish and maintain an internal property control system for 

the control, use, maintenance, repair, protection, and preservation of 

government property in their possession.15

The Navy currently has 359 repair contractors using its Web-based 

inventory management system, known as the DOD Commercial Asset 

Visibility System. This system provides the Navy with asset reporting 

coverage for more than 95 percent of its commercial repair business. 

For fiscal year 2002, the most recent and complete data available at the 

time of our review, the Naval Inventory Control Point reported that 4,229 

government-furnished material shipments (representing 4,301 items valued 

at approximately $115 million) had been shipped to its repair contractors. 

Table 1 shows the derivation of the sample size of our survey, including 

the number and value of shipments for which we received survey 

responses. 

 14 The Defense Logistics Agency—which operates and manages 23 storage depots—

receives, stores, and issues inventory and maintains inventory records. 

15 DOD 4161.2-M, DoD Manual for the Performance of Contract Property Administration, 

December 1991, paragraph C3.4; Federal Acquisition Regulation (FAR), Subpart 45.502. 

Background 
Page 6 GAO-04-779 Defense Inventory 

Table 1: Fiscal Year 2002 Government-Furnished Material Shipments by Number 

and Value 

Categories of governmentfurnished material shipments Number of 

shipments 

Number of 

items Value

Universe of shipments to Navy 

repair contractors 4,229 4,301 $115,310,392

Audit sample shipments 

• Unclassified and sensitive 302 338 9,652,910

• Classified 6 6 2,241,116

Total sample shipments 308 344 $11,894,026

Total shipments captured in 

survey responsesa

 207 243 $9,922,155

Source: GAO’s analysis of Naval Inventory Control Point data. 

a

These shipments represent 67 percent of the total sample shipments. All classified shipments and 

dollar values are included in this category. Nine of the repair contractors in our survey did not provide 

data for the remaining 101 shipments, or 33 percent of our total sample. 

DOD requires the Navy to use a number of procedures to monitor items 

shipped to and received by repair contractors. First, the recipient of the 

material is responsible for notifying the Naval Inventory Control Point 

once an item has been received. If the Naval Inventory Control Point has 

not been provided a receipt within 45 days of shipment, it is required to 

follow up with the intended recipient.16 The rationale behind these 

requirements is that until receipt is confirmed, the exact status of the 

shipment is uncertain and therefore vulnerable to fraud, waste, or abuse. 

The Naval Inventory Control Point is also required by DOD and Navy 

procedures to submit quarterly reports to the Defense Contract 

Management Agency identifying all government-furnished material that 

has been provided to a contractor.17 These reports allow the Defense 

Contract Management Agency to independently verify that Navy repair 

contractors have accounted for all government-furnished material shipped 

 16 DOD 4000.25-2-M, Military Standard Transaction Reporting and Accounting 

Procedures (MILSTRAP), September 2001 (as amended by changes 1&2), paragraphs C6.6 

and C6.7. 

17 DOD 4140.1-R, DoD Supply Chain Materiel Management Regulation, May 23, 2003, 

paragraph C5.11.2.4; DOD 4161.2-M, DoD Manual for the Performance of Contract 

Property Administration, December 1991, paragraph C5.2.6; and SECNAVINSTR 

4440.32A, Control of Contractor Access to DoD Material Inventories and Determinations 

for the Supply of Government Furnished Material, September 27, 1991, paragraph 

6d(5)(b). 
Page 7 GAO-04-779 Defense Inventory 

to them. As a result, the Defense Contract Management Agency does not 

have to rely strictly on records provided by Navy repair contractors. 

In addition to these DOD and Navy procedures, the Navy, as a 

representative of the federal government, is also obligated to establish and 

maintain effective internal control systems. The Federal Managers’ 

Financial Integrity Act of 198218 requires the General Accounting Office to 

issue standards for internal control in government.19 According to these 

standards, internal control is defined as an integral component of an 

organization’s management that provides reasonable assurance that the 

following objectives are being achieved: (1) effectiveness and efficiency of 

operations, (2) reliability of financial reporting, and (3) compliance with 

applicable laws and regulations. A subset of these objectives is the 

safeguarding of assets. Internal control should be designed to provide 

reasonable assurance regarding prevention of or prompt detection of 

unauthorized acquisition, use, or disposition of an agency’s assets. 

Effective and efficient internal control activities help ensure that an 

agency’s control objectives are accomplished. The control activities are 

the policies, procedures, techniques, and mechanisms that enforce 

management’s directives, such as the process of adhering to DOD 

requirements for receipt of government-furnished material and issuance of 

quarterly government-furnished material status reports. 

DOD annually ships inventory valued at billions of dollars to various 

locations around the world. For years, DOD has had difficulty tracking this 

inventory from origin to destination. The accountability problem with 

shipped inventory is part of a more global issue. Since at least 1990, we 

have considered DOD’s inventory management to be a high-risk area 

because DOD’s inventory management procedures are ineffective. The 

lack of adequate controls over shipped inventory and the resulting 

vulnerability to undetected loss or theft have been major areas of concern. 

In March 1999, we reported that significant weaknesses existed at all 

levels of the Navy’s shipped inventory management structure, leading to 

potential theft or undetected losses of items and demonstrating inefficient 

 18 31 U.S.C. 3512(b). 

19 U.S. General Accounting Office, Internal Control: Standard for Internal Control in the 

Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: Nov. 1999). 
Page 8 GAO-04-779 Defense Inventory 

and ineffective logistics management practices.20 We concluded that these 

weaknesses and the problems they created were primarily a result of the 

Navy not following its own procedures regarding controls over shipped 

inventory. In following up with the Navy, we found that the Navy had 

implemented many of our recommendations that have improved the 

accountability over its shipped inventory. According to Naval Inventory 

Control Point officials, at least 75 percent of their shipped inventory 

discrepancies have been resolved. Also, according to a June 2003 DOD 

Office of the Inspector General report, the Navy had taken actions to 

improve its procedures and controls to account for items repaired at 

commercial repair facilities. However, the DOD Office of the Inspector 

General found that additional improvements were needed to improve the 

monitoring and oversight of shipped inventory.21

The Naval Inventory Control Point and its repair contractors are not 

following DOD inventory management control procedures governing the 

accountability for and visibility of government-furnished material shipped 

to its repair contractors. As a result, this inventory is vulnerable to loss or 

theft. First, the Naval Inventory Control Point is not following a DOD 

procedure that requires repair contractors to acknowledge receipt of 

government-furnished material that has been shipped to them from the 

Navy’s supply system. Consequently, the Naval Inventory Control Point is 

not following another DOD procedure that requires it to follow up with its 

repair contractors that have not confirmed receipt of shipped material. 

Additionally, the Naval Inventory Control Point is not following DOD and 

Navy procedures that require quarterly reports on the status of 

government-furnished material shipped to Navy repair contractors be 

provided to the Defense Contract Management Agency. 

 20 U.S. General Accounting Office, Defense Inventory: Navy’s Procedures for Controlling 

In-Transit Items Are Not Being Followed, GAO/NSIAD-99-61 (Washington, D.C.: 

Mar. 31,1999). 

21 Department of Defense Office of the Inspector General, Logistics: Followup Audit of 

Depot-Level Repairable Assets at Selected Army and Navy Organizations, D-2003-098 

(Arlington, Virginia: June 5, 2003). 

Inventory 

Management Control 

Procedures Are Not 

Being Followed 
Page 9 GAO-04-779 Defense Inventory 

Navy repair contractors are not routinely acknowledging receipt of 

government-furnished material that has been shipped to them from the 

Navy’s supply system. According to a DOD procedure, repair contractors 

must enter shipments into their inventory records and notify the inventory 

control point when material has been received. This material receipt 

acknowledgment is designed to maintain accountability for all shipped 

items, including government-furnished material that has been shipped to 

Navy repair contractors in usable condition from the Navy’s supply 

system. Additionally, the Navy must adhere to internal control standards 

outlined by the General Accounting Office, such as providing assurance 

that assets are safeguarded against unauthorized acquisition, use, or 

disposition. 

Navy repair contractors are not routinely adhering to the DOD procedure 

to acknowledge receipt of government-furnished material shipped to them 

because Naval Inventory Control Point officials are not requiring them to 

do so. By not requiring repair contractors to receipt, the Naval Inventory 

Control Point does not follow up with its repair contractors within 

45 days—as required by DOD procedure—when these repair contractors 

fail to confirm receipt of government-furnished material shipped to them. 

Naval Inventory Control Point officials acknowledged that they only 

become aware that a contractor has not received an item if the contractor 

inquires about the shipment. 

Naval Inventory Control Point personnel provided several reasons why 

Navy repair contractors are not being required to notify the Naval 

Inventory Control Point of material receipt. They indicated that the Naval 

Inventory Control Point does not require its repair contractors to 

acknowledge receipt of government-furnished material because such 

material is provided with the expectation that it will immediately be 

consumed in the repair of other items. Naval Inventory Control Point 

officials also stated that submitting notification of receipt for this material 

might overstate the inventory levels in the DOD Commercial Asset 

Visibility System—the Navy’s inventory management system—because the 

system would show this material as on-hand at its repair contractors’ 

facilities when the material is actually earmarked for immediate use in the 

repair of another item. 

We have noted the Naval Inventory Control Point officials’ concerns about 

the potential for notification of receipt of government-furnished material 

to overstate inventory levels. However, one of the Navy repair contractors 

in our review currently uses the DOD Commercial Asset Visibility System 

to enter receipt of government-furnished material, without overstating the 

Navy Is Not Requiring Its 

Repair Contractors to 

Acknowledge Receipt of 

Government-Furnished 

Material 
Page 10 GAO-04-779 Defense Inventory 

inventory levels maintained within the system. Specifically, the Navy 

repair contractor is using a standard module of the DOD Commercial 

Asset Visibility System to enter receipt of material received in usable 

condition from the Navy’s supply system. Upon entering a receipt of 

material in the system, the contractor then issues the item to itself for 

immediate use in the repair of another item. This process eliminates the 

possibility of adverse impacts to inventory levels. However, the Naval 

Inventory Control Point is not using this module of the DOD Commercial 

Asset Visibility System for the receipt of material received in usable 

condition. Additionally, in our previous Air Force report on shipments to 

repair contractors,22 we found that in contrast to the Navy, the Air Force 

requires repair contractors to issue a notification of receipt for material 

that they have received. 

For fiscal year 2002, the most recent and complete data available at the 

time of our review, the Naval Inventory Control Point reported that 

4,229 government-furnished material shipments (representing 4,301 items 

valued at approximately $115 million) had been shipped to its repair 

contractors. We randomly selected and examined 308 governmentfurnished material shipments, representing 344 items that were shipped to 

Navy repair contractors. We surveyed 29 Navy repair contractors to 

determine if they had recorded receipts for these shipments in their 

property records. The repair contractors had recorded receipts for all 

classified shipments. However, they could not document the receipt of 4 

unclassified shipments (representing 4 items). Because our sample was 

randomly selected, the results can be projected to the entire universe of 

government-furnished material managed by the Naval Inventory Control 

Point. We estimate that 50 unclassified items may be unaccounted for, 

with a value of about $729,000 in inventory of aircraft-related governmentfurnished material for fiscal year 2002.23

Lack of contractor notification has impeded the Naval Inventory Control 

Point’s visibility of government-furnished material. Without such 

notification, the Naval Inventory Control Point cannot be assured that its 

repair contractors have received all shipped material. Finally, because the 

Naval Inventory Control Point does not have data on unconfirmed 

government-furnished material shipments, it lacks the ability to 

 22 See GAO-02-617. 

23 This is the mean value based on our analysis. We are 95 percent confident that between 

4 and 98 items are unaccounted for with a value of between $58,300 and $1,428,350. 
Page 11 GAO-04-779 Defense Inventory 

independently know when corrective actions, such as resolving inventory 

discrepancies, are needed. As a result, the Navy’s inventory continues to 

be at risk of fraud or loss. 

The Naval Inventory Control Point is also not following DOD and Navy 

procedures that require Naval Inventory Control Point officials to provide 

the Defense Contract Management Agency with quarterly status reports 

showing all shipments of government-furnished material that have been 

provided to its repair contractors.24 According to the procedures, these 

reports should include information about total shipments and their dollar 

value, number of shipments for which receipts are unknown, and rejected 

requisitions. The purpose of the reports is to assist the Defense Contract 

Management Agency in independently verifying contractor records of 

government-furnished material. 

A Navy procedure designates individuals within the inventory control 

point to serve as the management control activity to, among other things, 

generate and distribute the required quarterly government-furnished 

material status reports.25 According to Naval Inventory Control Point and 

Defense Contract Management Agency officials, the inventory control 

point has not provided the Defense Contract Management Agency with the 

required quarterly reports. The inventory control point officials stated that 

they were unaware of the requirement to provide quarterly reports to the 

Defense Contract Management Agency. Although a number of standard 

DOD and Navy inventory management control procedures stipulate the 

requirement to generate and distribute the quarterly reports, inventory 

control point officials lack recognition of this reporting requirement. The 

Naval Inventory Control Point currently lacks procedures to ensure that 

these quarterly reports are generated and distributed to the Defense 

Contract Management Agency as required by DOD and Navy procedures. 

 24 DOD 4140.1-R, DoD Supply Chain Materiel Management Regulation, May 23, 2003, 

paragraph C5.11.2.4; DOD 4161.2-M, DoD Manual for the Performance of Contract 

Property Administration, December 1991, paragraph C5.2.6; and SECNAVINSTR 

4440.32A, Control of Contractor Access to DoD Material Inventories and Determinations 

for the Supply of Government Furnished Material, September 27,1991, paragraph 

6d(5)(b). 

25 SECNAVINSTR 4440.32A, Control of Contractor Access to DoD Material Inventories and 

Determinations for the Supply of Government Furnished Material, September 27,1991, 

paragraphs 4c and 6d(2)(d). 

Navy Is Not Submitting 

Required Quarterly Reports 
Page 12 GAO-04-779 Defense Inventory 

Proper distribution of the quarterly status reports is vital to the 

management of government-furnished material. A 1995 DOD Inspector 

General audit report of management access to DOD’s supply system 

asserted that the Defense Contract Management Agency serves as the last 

line of defense in protecting material resources and needs an independent 

record of the government-furnished material shipped to repair contractors. 

These quarterly reports serve as such a record and prevent the Defense 

Contract Management Agency from having to rely solely on the repair 

contractors’ records of government-furnished material. 

Inventory worth millions of dollars is vulnerable to fraud, waste, or abuse 

because the Naval Inventory Control Point is not adhering to DOD 

inventory management control procedures for government-furnished 

material shipped to its repair contractors. Because the Naval Inventory 

Control Point has not required its repair contractors to acknowledge 

receipt of government-furnished material, it will continue to lack 

assurance that its repair contractors have received shipped material. In 

addition, without requiring receipts, the Naval Inventory Control Point will 

be unable to follow up on unconfirmed material receipts within the 

required 45 days. As a result, the Naval Inventory Control Point will 

continue to lose the ability to understand inventory management 

weaknesses and take necessary corrective action. Furthermore, without 

the Naval Inventory Control Point implementing procedures to ensure that 

quarterly reports for all shipments of government-furnished material to its 

repair contractors are generated and distributed to the Defense Contract 

Management Agency, the Defense Contract Management Agency might be 

impaired in its ability to serve as the last line of defense in protecting 

government-furnished material. 

To improve the control of government-furnished material shipped to Navy 

repair contractors, we recommend that the Secretary of Defense direct the 

Secretary of the Navy to instruct the Commander, Naval Inventory Control 

Point, to implement the following three actions: 

• Require Navy repair contractors to acknowledge receipt of material that is 

received from the Navy’s supply system as prescribed by DOD procedure. 

• Follow up on unconfirmed material receipts within the 45 days as 

prescribed in the DOD internal control procedures to ensure that the 

Naval Inventory Control Point can reconcile material shipped to and 

received by its repair contractors. 

Conclusion 

Recommendations for 

Executive Action 
Page 13 GAO-04-779 Defense Inventory 

• Implement procedures to ensure that quarterly reports of all shipments of 

government-furnished material to Navy repair contractors are generated 

and distributed to the Defense Contract Management Agency. 

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

recommendations and provided estimated timelines for implementation of 

each of the recommendations. DOD’s written comments on this report are 

reprinted in their entirety in appendix II. 

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

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

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

appropriate congressional committees; the Secretary of Defense; the 

Secretary of the Navy; the Director, Office of Management and Budget; and 

the Director, Defense Logistics Agency. We will also make copies available 

to others upon request. In addition, the report will be available at no 

charge on the GAO Web site at http://www.gao.gov. 

William M. Solis 

Director 

Defense Capabilities and Management 

Agency Comments 
Appendix I: Scope and Methodology 

Page 14 GAO-04-779 Defense Inventory 

For the purposes of this review, government-furnished material is defined 

as either (1) usable items (commonly referred to as “A” condition items 

that the Naval Inventory Control Point directs to be shipped from Navy 

wholesale warehouses to its repair contractors or (2) items that the Navy 

repair contractors have repaired to usable condition and issued to 

themselves to use in completing the repair of another item. According to 

Naval Inventory Control Point officials, their use of government-furnished 

material occurs in three different circumstances where an item is needed 

to complete the repair of another item because the item in question is 

(1) missing when the other item is inducted for repair, (2) beyond repair or 

beyond economical repair, or (3) needed to complete the expeditious 

repair of another item. 

To assess the Naval Inventory Control Point’s and its repair contractors’ 

adherence to procedures for controlling government-furnished material, 

we took the following steps: 

• To identify criteria for controlling shipped inventory, we reviewed 

Department of Defense (DOD) and Navy procedures, obtained other 

relevant documentation related to shipped inventory, and discussed 

inventory management procedures with officials from the following 

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

Naval Inventory Control Point; Mechanicsburg, Pennsylvania; the Naval 

Inventory Control Point, Philadelphia, Pennsylvania; and the Defense 

Contract Management Agency, Alexandria, Virginia. 

• Because of long-standing problems with the accuracy of data in DOD’s 

inventory management systems, we took a number of measures to assess 

the reliability of the Naval Inventory Control Point’s data. To assess the 

data, we performed electronic testing for obvious errors in accuracy and 

completeness in the data on government-furnished material shipped to 

Navy repair contractors. When we found discrepancies in the data, such as 

missing data elements and data entry errors, we brought them to the Naval 

Inventory Control Point officials’ attention and worked closely with them 

to correct the discrepancies before conducting our analysis. In addition, 

we statistically selected a random sample of the Navy’s data for review. 

This sampling methodology enabled us to independently verify the overall 

accuracy of the Navy’s data on government-furnished material shipped to 

Navy repair contractors. 

• To identify the number, value, and classification of the governmentfurnished material shipments, we obtained computerized supply records 

from the Navy’s transaction history file of all shipments between 

October 2001 and September 2002 from the Naval Inventory Control 

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

Page 15 GAO-04-779 Defense Inventory 

Point’s two office locations—Philadelphia and Mechanicsburg, 

Pennsylvania. The records contained descriptive information about each 

shipment, including document number, national stock number, quantity 

shipped, classification, and source of supply. After some preliminary data 

analysis, we excluded all records from the Mechanicsburg office due to 

the data set mistakenly capturing nongovernment-furnished material as 

government-furnished material. 

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

computerized shipment data obtained from the Naval Inventory Control 

Point’s transaction history file, including data such as national stock 

number, quantity, source of supply, and transaction dates. We randomly 

selected 302 unclassified or sensitive shipments (representing 338 items) 

and selected the total population of 6 classified shipments (representing 

6 items) that were issued to Navy repair contractors in fiscal year 2002 as 

government-furnished material. We randomly selected and sent surveys to 

29 Navy repair contractors (associated with 83 unique repair contracts) for 

our review. We received survey responses from 20 of the 29 Navy repair 

contractors, representing 207 government-furnished material shipments 

(corresponding to 243 items). Four of these Navy repair contractors 

received the 6 shipments of classified shipments. Because the number of 

Navy repair contractors and government-furnished material shipments 

were randomly selected, the results of our analysis can be projected to all 

Navy repair contractors and shipments. 

• To determine how Navy repair contractors are granted access to 

government-furnished material (i.e., federal supply class or stock number), 

we conducted a modified statistical sample of the various contractual 

agreements between the Navy and its repair contractors. We initially 

planned to manually review a subset of 40 contracts associated with our 

sample shipments to determine how the government-furnished material 

was identified in the contract. However, we revised our approach when we 

discovered that the Navy’s inventory management system had the 

functionality to match each of our items by stock number to the associated 

Navy repair contracts and contractors that are repairing the items. As a 

result, we reviewed all of the contracts associated with our sample 

shipments. We found each of our sample shipments was listed by national 

item identification number in the contractual repair agreement and based 

on certain circumstances (such as items are missing on induction, broken 

beyond economical repair, or are needed for the expeditious repair of 

another higher assembly item), these items were furnished to the 

contractor as government-furnished material. 
Appendix I: Scope and Methodology 

Page 16 GAO-04-779 Defense Inventory 

• To determine whether Navy repair contractors had received and 

accounted for our selected shipments, we surveyed each randomly 

selected contractor to assess whether government-furnished material 

shipments delineated in the Naval Inventory Supply Control Point’s supply 

records had been received and entered into the contractor’s property 

control records. 

• To determine what happened to sample shipments that had reportedly not 

been received by the Navy repair contractors, we provided a listing to the 

Naval Inventory Control Point in Philadelphia for further review. To learn 

whether issues associated with unaccounted for shipments were 

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

Inventory Control Point implementing guidance. Such information 

provided the basis for conclusions regarding the adherence to procedures 

for controlling shipped inventory. 

The Navy repair contractors that responded to our survey were BAE Flight 

Systems, Nashua, New Hampshire; Boeing, Jacksonville, Florida; 

Lockheed Martin, Marietta, Georgia; Lockheed Martin, Oswego, New York; 

Lockheed Martin, Syracuse, New York; Northrop Grumman, Bethpage, 

New York; Northrop Grumman, Woodland Hills, California (two 

locations); Systems and Electronics, Inc., Sanford, Florida; Raytheon, 

Indianapolis, Indiana; Raytheon, Goleta, California; Raytheon, McKinney, 

Texas; Raytheon Technical Services Corp., Indianapolis, Indiana; General 

Dynamics, Bloomington, Minnesota; Global Technical Systems, Virginia 

Beach, Virginia; Sikorsky Aircraft, Shelton, Connecticut; Rockwell Collins, 

Cedar Rapids, Iowa; Beaver Aerospace, Livonia, Michigan; L3 

Communications, Alpharetta, Georgia; and Parker Hannifin, Irvine, 

California. 

Our work was performed from March 2003 through April 2004 in 

accordance with generally accepted government auditing standards. 
Appendix II: Comments from the Department 

of Defense 

Page 17 GAO-04-779 Defense Inventory 

Appendix II: Comments from the Department 

of Defense 
Appendix II: Comments from the Department 

of Defense 

Page 18 GAO-04-779 Defense Inventory 
Appendix II: Comments from the Department 

of Defense 

Page 19 GAO-04-779 Defense Inventory 
Appendix III: GAO Contact and Staff 

Acknowledgments 

Page 20 GAO-04-779 Defense Inventory 

William M. Solis, (202) 512-8412 

In addition to the contact listed above, Lawson Gist, Jr., Jacqueline S. 

McColl, Corrie J. Dodd, Anthony C. Fernandez, Arthur L. James, Jr., 

Stanley J. Kostyla, David A. Mayfield, and Robert K. Wild made key 

contributions to this report. 

Appendix III: GAO Contact and Staff 

Acknowledgments 

GAO Contact 

Acknowledgments 
Related GAO Products 

Page 21 GAO-04-779 Defense Inventory 

Defense Inventory: Air Force Needs to Improve Control of Shipments to 

Repair Contractors. GAO-02-617. Washington, D.C.: July 1, 2002. 

Performance and Accountability Series: Major Management Challenges 

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

D.C.: January 1, 2001. 

High-Risk Series: An Update. GAO-01-263. Washington, D.C.: January 1, 

2001. 

Defense Inventory: Plan to Improve Management of Shipped Inventory 

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

February 22, 2000. 

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

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

February 2, 2000. 

Defense Inventory: Property Being Shipped to Disposal Is Not Properly 

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

DOD Financial Management: More Reliable Information Key to 

Assuring Accountability and Managing Defense Operations More 

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

Defense Inventory: DOD Could Improve Total Asset Visibility Initiative 

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

April 12, 1999. 

Defense Inventory: Navy Procedures for Controlling In-Transit Items 

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

1999. 

Performance and Accountability Series: Major Management Challenges 

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

Washington, D.C.: January 1, 1999. 

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

1999. 

Department of Defense: Financial Audits Highlight Continuing 

Challenges to Correct Serious Financial Management Problems. 

GAO/T-AIMD/NSIAD-98-158. Washington, D.C.: April 16, 1998. 

Related GAO Products 
Related GAO Products 

Page 22 GAO-04-779 Defense Inventory 

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

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

Inventory Management: Vulnerability of Sensitive Defense Material to 

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

Defense Inventory Management: Problems, Progress, and Additional 

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

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

Washington, D.C.: February 1, 1997. 

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

Washington, D.C.: February 1, 1997. 

(350337) 
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