GAO/OSI/NSIAD-00-243R Navy In-Transit Inventory Initiatives

United States General Accounting Office

Washington, DC 20548

Office of Special Investigations

B-285977

August 24, 2000

The Honorable Richard Durbin

The Honorable Tom Harkin

United States Senate

The Honorable Peter DeFazio

The Honorable Carolyn B. Maloney

House of Representatives

Subject: Defense Inventory: Status of Navy Initiatives to Improve Its In-Transit

Inventory Process

In response to your May 18, 2000, request, we are providing a status report on the

Navy’s initiatives to address, at least in part, a number of in-transit inventory

problems that we identified in recent reports.1The information in this letter is based

on what the Navy has reported to us as the specific actions it has taken to address the

recommendations that we made in our March 1999 report. Concerns about the

vulnerability of inventory shipments to fraud, waste, and abuse led the Congress to

enact section 349 of the Strom Thurmond National Defense Authorization Act for

Fiscal Year 1999 (P.L. 105-261), which requires the Department of Defense to develop

a comprehensive plan for tracking inventory while it is being shipped. We are

currently reviewing the Department of Defense’s implementation of its departmentwide plan to address in-transit inventory management problems and will be reporting

on our findings this fall.

Results In Brief

In response to our recommendations, the Navy has reported a number of actions that,

as specified below, are complete or in process. Overall, we are encouraged by the set

of actions and believe that once they are fully implemented, short and long-term

improvements in inventory management will result. We are particularly encouraged

by the Navy’s plan to reengineer its processes to create long-term system solutions.

1

Department of the Navy: Breakdown of In-Transit Inventory Process Leaves It Vulnerable to Fraud

(GAO/OSI/NSIAD-00-61, Feb. 2, 2000) and Defense Inventory: Navy’s Procedures for Controlling InTransit Items Are Not Being Followed (GAO/NSIAD-99-61, Mar. 31, 1999).
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Recommendations and Reported Actions

Recommendation 1

The Navy should comply with existing Department of Defense

and Navy procedures regarding material receipt

acknowledgment of in-transit shipments and reemphasize

follow-up procedures on unconfirmed warehouse and purchased

material.

According to Department of Defense comments on our report, the Commander, Naval

Supply Systems Command, has communicated the importance of the proper and

timely posting of receipts and the prompt and accurate response to follow-up

requests. Additionally, the Commander has chartered an Integrated Process Team to

look at current systems, policies, and processes to investigate material receipt

acknowledgement problems and proposed short-term solutions. Department of

Defense officials also stated that the long-term solution to noncompliance with

receipt and follow-up procedure would be to reengineer the entire in-transit process

to include automation, elimination of errors, metrics to monitor the process, and

incorporation of best business practices.

Recommendation 2

The Navy should modify its integrated accounting and logistics

systems so that they routinely update both financial and

inventory records when in-transit inventory items are received.

Until the systems are operational, the Naval Inventory Control

Point in Philadelphia, Pennsylvania, should establish routine

reconciliation procedures for their supply and financial records

to ensure oversight and control over in-transit inventory items.

The Supply Systems Command’s Integrated Process Team has designed an initiative

known as “Brute Force” to provide temporary improvements in the manual

reconciliation process until automated programming changes can be made. Brute

Force involves the reallocation and increase in staff to (1) resolve unconfirmed

receipts of warehoused material earlier, thereby avoiding potential write-offs; (2)

reconcile in-transit write-offs of classified items with inventory records; and (3)

perform causative research and analysis of write-offs of warehoused material.

The Brute Force team reportedly tracks and investigates unconfirmed receipts of

warehoused material shipments valued at over $300,000 and unconfirmed receipts of

warehoused material shipments containing classified items. To date in fiscal year

2000, the Brute Force team reports successfully resolving 1,328 unconfirmed receipts

of warehoused material at a reported valued at $547.2 million, thus avoiding their

write-off.
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The Brute Force team also performed research and analysis to determine the cause of

fiscal year 1999 warehoused material written off as lost at the Naval Inventory

Control Point in Philadelphia. Based on its research and analysis, the team reported

confirming that the Navy had written off as lost 8,542 shipments of warehoused

material (valued at $143.3 million) that had actually been received by the intended

recipients. These discrepancies reduced the reliability of inventory reports, obscured

true inventory losses, and misstated the number of items on hand. As of August 2000,

Brute Force team personnel had corrected $82.5 million of the $143.3 million in writeoff errors by reversing the write-offs and properly entering receipts for the shipments

into Navy records.

Using data compiled from its results, the Brute Force team compiled summary data

on inventory shipment losses that highlighted breakdowns in the physical distribution

process and provided the team a means of assessing the effectiveness of the Navy’s

policies and procedures governing shipped inventory. For example, the compilation

of such data facilitated the Supply Systems Command’s ability to identify the

predominant causes of shipped inventory losses, such as internal, customer

procedure, and receipt-reporting process problems.

Recommendation 3

The Navy should specifically target in-transit inventory problems

as an issue for review in Federal Managers’ Financial Integrity

Act assessments.

According to the Navy’s Office of Financial Operations, the Naval Inventory Control

Point reviewed selected aspects of shipped inventory during its fiscal year 1999

management control review pursuant to the Federal Managers’ Financial Integrity Act

of 1982. In a September 1, 1999, letter to the Chief of Naval Operations, the Vice

Commander, Naval Supply Systems Command, identified material weaknesses in

Naval Inventory Control Point internal controls over shipped inventory. The Vice

Commander’s letter also outlined planned corrective actions, including milestones

and timetables for completion. The corrective actions include (1) the identification

and implementation of metrics to improve monitoring and performance measurement

of the in-transit process, (2) automated program changes to improve visibility of

sensitive items, (3) proof of shipment and delivery confirmation, and (4) evaluation of

commercial practices and the in-transit processes of other military services. The

corrective actions have an estimated completion date of December 2000.

Recommendation 4

The Navy should establish performance measures, milestones,

and timetables to help monitor the progress being made to

reduce the vulnerability of in-transit inventory to undetected loss

or misplacement.
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The Naval Supply Systems Command established four goals at the Naval Inventory

Control Point to reduce fiscal year 2000 write-offs and gain better control of

classified, sensitive, and high-dollar value warehoused material. The goals, based on

the number, value, and types of unconfirmed receipts of warehoused material

shipments follow:

• Eighty percent of all unconfirmed receipts of warehoused material shipments

(valued at over $350,000) should be resolved within 180 days from the date the

material was issued.

• All unconfirmed receipts of sensitive warehoused material shipments should be

resolved within 180 days from the date the material was issued.

• All unconfirmed receipts of classified warehoused material shipments should be

resolved within 120 days from the date the material was issued.

• The value of fiscal year 2000 warehoused material write-offs should be 30 percent

less than the value of fiscal year 1999 warehoused material write-offs.

Progress toward attaining these goals is assessed monthly by the Commander, Naval

Supply Systems Command.

The Naval Supply Systems Command also added in-transit metrics to its Corporate

Information System as part of its efforts to reengineer the Navy’s in-transit process.

According to Navy officials, the Corporate Information System is available on the

Web and provides users with data analysis tools, enabling them to quickly identify

problem areas or activities so that focused corrective actions can be taken. The

metrics in place provide various levels of aggregation dependent on user menu

selection. Two metrics available in the Corporate Information System, along with

additional aggregations specific to each metric, include

• dollar value and number of unconfirmed receipts of warehoused material, with

additional aggregations involving separate receipt and issue transactions and the

capability to sort by the activity that reports the issue or receipt and

• dollar value and number of inventory adjustments (e.g., incoming shipment and

warehoused material write-offs), with additional aggregations involving the

capability to sort by budget project and by the activity that processes the

inventory adjustment.

Metrics have also been implemented to measure the follow-up process for aged

transactions (i.e., backlogs of warehoused material discrepancy reports at each

activity). The user can sort the data by budget project (e.g., Navy Working Capital

Fund), receipt or issue transaction, action holder, and material classification. The

information can be further stratified by overall document age, dollar value, and
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response code. The response code provides the user with the cause of the

unconfirmed warehoused-material receipt, which is extremely valuable in analyzing

the in-transit process and identifying systemic problems.

According to Supply Systems Command officials, the Integrated Process Team briefs

the Commander, Vice Commander, and Executive Director of the Naval Supply

Systems Command about the metrics on a monthly basis. These briefings address

timely issues using the implemented metrics, and the metrics are continuously

reviewed and revised as necessary to ensure that the proper management attention is

being paid to the in-transit process.

Agency Comments

Senior-level logistics and supply officials of the Naval Supply Systems Command

provided comments on a draft of this letter. The officials agreed with the facts

presented and provided some clarifications. We revised our letter as appropriate.

Scope and Methodology

To determine the Navy’s progress in addressing our March 1999 recommendations,

we held discussions with Naval Supply Systems Command officials in

Mechanicsburg, Pennsylvania. To determine whether the Navy had emphasized intransit inventory as part of its assessment of internal controls, we reviewed

assessments from the Naval Supply Systems Command for fiscal year 1999.

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We are sending copies of this letter to the appropriate congressional committees; the

Honorable William S. Cohen, Secretary of Defense; the Honorable Richard Danzig,

Secretary of the Navy; and the Honorable Jacob J. Lew, Director, Office of

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

upon request. If you have any questions regarding this letter, please call Robert Hast

at (202) 512-6722 or David Warren at (202) 512-8412. Key contributors to this letter

include John Ryan, Norman M. Burrell, Lawton Gist, and Sandra F. Bell.

Robert H. Hast David R. Warren

Assistant Comptroller General Director, Defense Management

for Special Investigations National Security and International

Office of Special Investigations Affairs Division

(600674)