14
 
                                
                    U.S. DEPARTMENT OF ENERGY
                   OFFICE OF INSPECTOR GENERAL
                                
                                
                                
                                
                                
                                
                                
                                
                 AUDIT OF DEPARTMENT OF ENERGY'S
                                
                         WAREHOUSE SPACE
 
 
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Report No.:  CR-B-97-01                    Capital Regional Audit Office
Date of Issue:  January 28, 1997           Germantown, Maryland  20874
 
                 
                 AUDIT OF DEPARTMENT OF ENERGY'S
                         WAREHOUSE SPACE
                                
                                
                        TABLE OF CONTENTS
 
 
                                                         Page
 
SUMMARY . . . . . . . . . . . . . . . .  . . . . . . .    1
 
PART I -    APPROACH AND OVERVIEW . . . . . . . . . .     2
 
            Introduction . . . . . . . . . . . . . . .    2
 
            Scope and Methodology . . . . . . . . . . .   2
 
            Background . . . . . . . . . . . . . . . .    3
 
PART II -   FINDING AND RECOMMENDATIONS . . . . . . . .   5
 
            Minimizing Warehouse Space . . . . . . . . .  5
 
PART III -  MANAGEMENT AND AUDITOR COMMENTS . . . . .  . 10
                                                      
                    
                    
                    U.S. DEPARTMENT OF ENERGY
                   OFFICE OF INSPECTOR GENERAL
                    OFFICE OF AUDIT SERVICES
                                
                 AUDIT OF DEPARTMENT OF ENERGY'S
                         WAREHOUSE SPACE
                                
                                
Audit Report Number:  CR-B-97-01
 
                             SUMMARY
 
 
  The Department of Energy (Department) and its contractors use
warehouses for the storage of furniture, equipment, and office
supplies.  The Department had about 3.5 million total square feet
of warehouse space of which about 493,400 square feet was leased
from outside sources.  The annual cost of these leases was over
$2.5 million.
 
  The purpose of the audit was to assess the efficiency of the
Departments use of warehouse space.  Our specific audit objective
was to determine whether the Department was minimizing the need
for warehouse space for the storage of furniture, office
supplies, and equipment.
 
  Although Federal Property Management Regulations require
Government agencies to continuously review their space
requirements and minimize the need for space, this was not always
being accomplished throughout the Department.  A review of four
entities (entities are both Department and contractor operations)
showed that the Department had more space than needed because
about 76,000 square feet of warehouse space was used to store
unusable, unneeded and/or excess furniture and equipment.  In
addition, office supplies were warehoused instead of adopting a
just-in-time or equivalent delivery system.  If two of the four
entities relinquished 76,000 square feet of warehouse space, the
Department could save about $1 million in lease costs over the
remaining lease periods.  Additional savings could be achieved by
implementing a just-in-time or equivalent delivery system to
reduce space needed for office supplies inventory.
 
  We recommended that the Department take action to dispose of
excess and unneeded property, reduce the storage of office
supplies, and establish stock levels for any furniture and office
supplies that need to be warehoused.  We also recommended
specific actions be taken at three of the four entities reviewed
that dealt with specific conditions identified at these
locations.
 
  The Assistant Secretary for Human Resources and Administration
generally agreed with the finding and three of the four
recommendations.  However, management did not agree to relinquish
leased warehouse space at DOE Headquarters until further studies
are completed.
                                
 
_______(Signed)____________________
Office of Inspector General
                                
                             
                             
                             PART I
                                
                      APPROACH AND OVERVIEW
 
INTRODUCTION
 
  The Department of Energy (Department) and its contractors use
warehouses for the storage of various items including furniture,
equipment, and office supplies.  As of August 23, 1996, the
Department had about 3.5 million square feet of total warehouse
space of which about 493,000 square feet was leased from outside
sources.  The annual cost of these leases was over $2.5 million.
 
  The purpose of the audit was to assess the efficiency of the
Department's use of warehouse space.  Specifically, our objective
was to determine whether the Department was minimizing the need
for warehouse space for the storage of furniture, equipment, and
office supplies.
 
SCOPE AND METHODOLOGY
 
  To accomplish our objective, we obtained and reviewed
applicable Federal and Departmental regulations and
correspondence related to warehouse activities.  We also reviewed
related reports issued by the Office of Inspector General and the
General Accounting Office.  Discussions were held with staff at
each site visited on policies designed to provide oversight and
control over warehouse operations.  We also held discussions with
officials from the General Services Administration (GSA) on the
benefits and limitations of just-in-time delivery systems,
leasing of warehouse space, and the disposal of personal
property.
 
  Information on warehouse space used for the storage of
furniture, equipment, and office supplies was requested from the
27 operation/field offices and the Federal Energy Regulatory
Commission (FERC).  From the responses received, 17 offices
reported storing office supplies,  24 offices reported storing
furniture, and 13 offices reported storing equipment.  This
information covered 69 separate Department entities (Department
and contractor operations).  We selected four of the 69 entities
covering about 583,000 square feet of warehouse space and FERC
covering about 26,000 square feet of space for a more detailed
review.  This included about 200,000 of the 493,000 square feet
of leased space.  The review was limited to warehouse operations
for the storage of furniture, equipment, and office supplies.  We
verified the data provided by these five entities by judgmentally
selecting and analyzing available supporting documentation.
 
  Our analysis included:
 
    o Verifying the amount of warehouse space used by the Department
      for the storage of  furniture, equipment, and office supplies.
   
    o Reviewing and discussing the contract terms related to
      warehouse operations including the amount of space used.
   
    o Reviewing personal property records and disposal programs for
      furniture and equipment.
   
    o Reviewing stock levels and ordering and delivery systems for
      furniture, equipment, and office supplies.
 
  In addition to obtaining information and conducting telephonic
discussions with responsible officials, we made site visits to
the four Departmental entities and FERC.  Site visits included
walk throughs and physical observations of warehouses and their
operations at Department of Energy Headquarters, Landover,
Maryland; Lockheed Martin, Oak Ridge, Tennessee; Department of
Energy, Oak Ridge, Tennessee; Lawrence Berkeley National
Laboratory, Berkeley, California; and FERC, Landover, Maryland.
 
  Work performed at FERC was reported separately in Office of
Inspector General report CR-B-96-01 dated May 24, 1996.  This
report identified areas where warehouse space and storage of
materials could be reduced.  As a result, FERC planned to reduce
its warehouse space and adopt a more frequent ordering program
for office supplies.
 
  The audit was made in accordance with generally accepted
Government auditing standards for performance audits and included
tests of internal controls and compliance with laws and
regulations to the extent necessary to satisfy the audit
objective.  Accordingly, we assessed internal controls regarding
warehouse practices and procedures.  Because our review was
limited, it would not necessarily have disclosed all internal
control deficiencies that may have existed.
 
  The audit was performed between April and August 1996.  We did
not rely on computer-processed data to accomplish our audit
objective.  An exit conference was held with Procurement and
Assistance Management representatives on December 10, 1996.
 
BACKGROUND
 
  The Code of Federal Regulations provides that each agency shall
establish and maintain such control of personal property
inventories as will ensure that the total cost involved will be
kept to the minimum consistent with program needs.  Further,
storage and warehouse services should be  operated in accordance
with generally accepted industrial management practices and
principles.
 
  Furniture, equipment, and office supplies are stored in
warehouses to support daily activities of the Department.  Stock
levels should be established considering all relevant factors
such as the item's usage, lead time for receiving an order, and
shelf life.  There are also economic factors to be considered
such as warehouse cost, handling, and ordering costs.  Stock
levels are designed to ensure that an adequate supply is
available to meet foreseeable needs.  In addition, stock levels
can be used to identify excess or surplus items being stored.
 
  Items excess to the needs of the Department should be disposed
of to minimize the use of warehouse space and to reduce costs.
There are several options available for the disposal of excess or
surplus furniture, equipment, and office supplies.  Donations to
nonprofit organizations; transfers within the Department, its
contractors, and to other Government agencies; and personal
property sales are commonly used disposal options.
 
  Although the Department does not require the use of a just-in-
time delivery system, it was   recently decided to abandon the
"Federal norm" as the standard for contractor purchasing systems
and move towards a "best commercial standards" practice.  One
goal of a just-in-time delivery system is to produce and deliver
goods just-in-time to be used.  This technique lowers inventory
carrying costs by reducing the need for warehouse space and the
amount invested in inventory.  The GSA provides several just-in-
time delivery systems for Federal agencies and their contractors.
The Department's Contractor Purchasing Council suggested this
system as one way of successfully relieving organizations from
owning, warehousing, maintaining, and protecting the inventory
necessary for mission accomplishment.
 
  Also, under the requirements of the Business Management
Oversight Pilot Project, Human Resource Management has
established performance objectives and measures for personal
property management systems for laboratories, nonlaboratory
contractors and field offices.  There are six performance
objectives and measures for personal property management.
Specifically under performance objective four and its measure,
each operations/field office should have a program in place for
the acquisition, management, control, and disposition of all
personal property.
 
  This report contains a finding that addresses minimizing
warehouse space that should be considered by management in
preparing the yearend assurance memorandum on management
controls.  Part II of this report provides details on our finding
and recommendations.  Part III of this report includes detailed
management and auditor comments.
                             
                             
                             
                             PART II
                                
                   FINDING AND RECOMMENDATIONS
                                
                   Minimizing Warehouse Space
 
 
FINDING
 
  Although Federal Property Management Regulations require
Government agencies to continuously review their space
requirements and minimize the need for space, this was not always
being accomplished throughout the Department.  The Department was
utilizing more  space than it needed because unusable, unneeded
and/or excess furniture and equipment was stored.  In addition,
office supplies were warehoused instead of adopting a just-in-
time or equivalent delivery system.  By relinquishing about
76,000 square feet of leased warehouse space, the Department
could save about $1 million in lease costs over the remaining
lease periods.  Additional savings could be achieved by
implementing a just-in-time or equivalent delivery system to
reduce space needed for office supplies inventory.
 
RECOMMENDATIONS
 
   We recommend the Assistant Secretary for Human Resources and
Administration take action to minimize warehouse space by:
 
      Instructing operation/field offices to:
 
         Dispose of excess property in a timely manner.
 
         Adopt a just-in-time or equivalent delivery system 
         for office supplies.
      
         Establish stock levels for any office supplies and 
         guidelines for storage of furniture to be held in 
         the warehouses.
      
         Review the need for all warehouse space.
      
         Require their contractors to perform the above
         recommendations.
 
     Requiring the Manager, Oakland Operations Office, to direct
     Lawrence Berkeley National Laboratory to:
 
         Dispose of all unneeded furniture.
      
         Relinquish 60,000 square feet of warehouse space.
   
     Requiring the Director, Logistics Management Division, Office
     of Administrative Services, at Department Headquarters to:
 
         Dispose of excess furniture, assess and justify the 
         retention of furniture awaiting repair or rehabili-
         tation, and dispose of unneeded specialty furniture.
      
         Relinquish its two warehouse annexes back to GSA and
         consolidate into a single warehouse, as quickly as 
         possible, in line with the downsizing efforts ongoing 
         at the Department.
 
      Directing the Manager, Oak Ridge Operations Office, to:
 
         Establish property records for personal property.
      
         Ensure that an effective system is in place for the
         acquisition, management, control, and disposition of 
         personal property.
 
MANAGEMENT REACTION
 
  The Assistant Secretary for Human Resources and Administration
generally agreed with the finding and recommendations 1, 2, and
4.  However, management did not agree to relinquish leased
warehouse space at DOE Headquarters until further studies are
completed.
 
                       DETAILS OF FINDING
 
 
  Federal Property Management Regulations establish policies and
procedures for agencies to follow in managing and operating
warehouses.  Agencies are required to continuously review their
needs for space and relinquish unneeded space.  The amount of
space should be limited to what is needed to accomplish their
programs, and space no longer needed should be considered excess.
These regulations also prescribe property management practices
that limit the amount of property on hand to what is needed to
accomplish their program.
 
WAREHOUSE SPACE
 
  The Department was not minimizing its need for warehouse space.
A review of four entities showed the amount of warehouse space
used for the storage of furniture, equipment, and office supplies
could be reduced at three entities.  Two of the three entities,
which leased about 173,000 square feet of warehouse space, could
reduce space by about 44 percent or 76,000 square feet.  It
appeared that the third entity, which owned the warehouse, could
also reduce space.  However, a complete review was not possible
to determine the actual amount of unneeded space because
inventory records and annual physical inventories were not
available for review.
 
STORAGE OF FURNITURE, EQUIPMENT AND OFFICE SUPPLIES
 
  Warehouse space was used to store unneeded and/or excess
furniture and equipment and furniture awaiting repair or
rehabilitation.  Also, a just-in-time or equivalent delivery
system was not utilized to minimize the storage and handling 
of office supplies.
 
Furniture and Equipment
 
  Three of the four entities stored unneeded and/or excess
furniture and equipment and furniture awaiting repair or
rehabilitation.  Two of the three entities used about 48,000 
of 72,000 square feet to store furniture and equipment.  At 
the third entity, the amount of space could not be determined 
because furniture and equipment was intermingled with other 
items such as scientific supplies, cable wire, and other 
materials outside the scope of our audit.
 
  One entity, for example, leased a main warehouse and two
annexes totaling about 53,300 square feet.  In addition, there
was a secured storage area adjacent to one of the entity's
loading dock that totaled about 6,400 square feet.  The two
annexes consisting of about 16,000 square feet were used to 
store excess furniture, furniture awaiting repair or 
rehabilitation,  and specialty furniture held for executive 
level offices.  All of the excess had already been identified 
as such prior to being received at the warehouse.  Also, 
furniture awaiting repair or rehabilitation was still being 
warehoused in the annexes even though there was no money 
budgeted for rehabilitation in Fiscal Years 1995 and 1996.  
In addition, there were no records maintained to determine 
how long the specialty furniture had been stored.  However, 
the deteriorated condition of the furniture led us to conclude 
that it had been in storage for an extended period of time.
 
  The entity discussed above had a Memorandum of Understanding
(MOU) with GSA for the disposal of furniture to reduce the
waiting period between the reporting of excess and when GSA 
would accept responsibility for disposal.  However, instead 
of promptly disposing of excess furniture through this MOU and 
holding the items at the secured storage area, the excess 
furniture was stored at the two annexes.  Logistics management 
staff informed  us that since the Department was already paying 
for the warehouse space, it didn't matter that the excess or 
unusable furniture was warehoused.
 
  By disposing of excess, unneeded, and unusable furniture, 
about 16,000 square feet of space could be relinquished back 
to GSA.  Warehouse operations at this entity could be consoli-
dated into the main warehouse, and the secured storage area 
could be used for future excess items awaiting disposal.  
Relinquishing the two annexes would save about $756,000 in 
lease costs over the remaining 5 years of the lease.
 
  Another entity that we visited leased a two-level warehouse
with 120,000 square feet of space and used 60,000 square feet 
for the storage of a large amount of old modular furniture and
archived records, as well as an excess area.  Warehouse officials
stated that this type of modular furniture was not used often and
the archived records were being stored until the moratorium on
accepting any research and development documents for storage at
the archive center was resolved.  By disposing of the unneeded
furniture, transferring the archived records to the archive
center, and consolidating the excess area into the bottom level,
about 60,000 square feet of warehouse space could be
relinquished.  About $289,000 in lease costs could be saved over
the remaining 2 years of the lease.
 
  In addition, three of the four entities had not established
stock levels for the amount of furniture that needed to be kept
on hand.  Agencies are required to establish and maintain control
of property that will ensure that the total cost involved will be
kept to the minimum consistent with program needs.  Without
establishing stock levels, entities will not know how much
warehouse space is actually needed to support mission operations.
 
  Also, the physical inventory at another entity had not been
done since 1993.  Warehouse officials could not locate inventory
records, provide a copy of the inventory, or any other property
records to show what furniture and equipment was stored in the
warehouse.  As a result, the personal property stored in the
warehouse could not be verified.  The Department's Business
Management Oversight Pilot Project states that each
operations/field office should have a system in place for the
acquisition, management, control and disposition of all personal
property.  In addition, Federal Property Management Regulations
require all agencies to continuously survey property to ensure
maximum use and promptly make available excess personal property
for transfer.
 
Office Supplies
 
  At two of the four entities, warehouse space was used to 
store office supplies instead of utilizing a just-in-time or 
equivalent delivery system.  These two entities used about 
15,800 out of 72,000 square feet of warehouse space for the 
storage of office supplies, which varied from 19 to 23 percent 
of total warehouse space for each entity.  For example, although 
paper could be ordered and received within 3 days from GSA at 
comparable prices, one entity had established policies to stock 
a 3-month supply.  The entity also allocated warehouse space for 
office supplies at a 90-day stock level.  However, because of 
budgetary constraints, less than 30 days of supplies were actually 
stored and the space was not reallocated.
 
  If these two entities used up the inventory of office supplies
and a adopted just-in-time or equivalent delivery system,
warehouse space could be used for other property or, if unneeded,
relinquished.  However, as discussed previously, at one entity
that owns space, it is unknown exactly how much could be better
utilized due to the lack of inventory records and physical
inventories of personal property.  At the second entity, some of
the space currently allocated to office supplies could be used to
store any remaining property once the two annexes are vacated and
the 16,000 square feet relinquished.
 
  Another entity had established a just-in-time delivery system
for office supplies except for copier paper because of their
concerns over the quality of paper required.  In addition,
individual offices procured large quantities of copier paper with
yearend funds and were allowed to store it at the warehouse for
future use.
 
  One entity was utilizing a just-in-time delivery system and 
had established vendor agreements for materials including office
supplies.  Although the just-in-time delivery system has been in
place since 1988, the vendor agreement for office supplies was
established in 1995.  Officials performed a cost-benefit analysis
for 1993 to show the benefits of utilizing a just-in-time
delivery system.  The analysis showed that savings of over 
$2.1 million could be achieved and over 66,000 square feet of
warehouse space could be reallocated.  Officials anticipate
additional savings and reallocations of warehouse space.
 
IMPACT ON WAREHOUSE OPERATIONS
 
  Reducing warehouse space for the storage of furniture,
equipment, and office supplies would reduce costs for the
Department.  At two of the four entities that leased warehouse
space, we calculated that disposing of unneeded and/or excess
furniture and equipment, specialty furniture, and furniture
awaiting repair or rehabilitation would free up about 76,000
square feet of warehouse space.  This would save the Department
about $1 million in lease costs if the unneeded space was
relinquished over the remaining lease periods.  Also, some of 
the 15,800 square feet of space used for the storage of office
supplies would be available when the supplies are used up after
adopting a just-in-time or equivalent delivery system.  When 
this space is vacated, action should be taken to identify total
warehouse space requirements and relinquish unneeded space.
Further, the Department should review all warehouse space to
identify space requirements and continue to minimize space in
line with downsizing efforts at the Department.
                            
                            
                            PART III
                                
                 MANAGEMENT AND AUDITOR COMMENTS
 
 
  In response to this report, the Assistant Secretary for Human
Resources and Administration generally concurred with three of
four recommendations.  Management believes that the Department
and its contractors are minimizing the need for warehouse space
and stated that most contractors have adopted just-in-time
inventory control processes.  A summary of management's comments
and our response follows.
 
  Recommendation 1.  Minimize warehouse space by instructing
operation/field offices to:
 
      Dispose of excess property in a timely manner.
   
      Adopt a just-in-time or equivalent delivery system for 
      office supplies.
   
      Establish stock levels for any office supplies and 
      guidelines for storage of furniture to be held in 
      the warehouses.
   
      Review the need for all warehouse space.
   
      Require their contractors to perform the above
      recommendations.
 
  Management Comments.  Concur.  The Assistant Secretary for
Human Resources and Administration will issue a memorandum to the
operations/field offices requiring them to: (a) dispose of excess
in a timely manner including furniture and office supplies; (b)
where it is in the best interest of the Government, adopt a just-
in-time or equivalent delivery system for office supplies; (c)
establish stock levels for office supplies and criteria for
storage of office furniture, furnishings, and equipment in the
warehouse; (d) review the need for warehouse space at the
operations/field offices; and (e) instruct their contractors to
do the same.  The memorandum is expected to be issued by February
28, 1997.
 
  Auditor Comments.  Management's comments are responsive to the
recommendation.
 
  Recommendation 2.  Require the Manger, Oakland Operations
Office, to direct Lawrence Berkeley National Laboratory to:
 
      Dispose of all unneeded furniture.
   
      Relinquish 60,000 square feet of warehouse space.
 
  Management Comments.  Concur in principle.  Management stated
that Berkeley has a program in place to excess all unneeded
furniture and has plans to use the modular furniture identified
in the report as it phases into a more open work environment.
Also, the current lease agreement prohibits relinquishing space
prior to the expiration of the 2 remaining years on the
agreement.  The Assistant Secretary for Human Resources and
Administration stated a memorandum will be issued to the Oakland
Operations Office instructing them to ensure that Berkeley still
has a current need for the entire 60,000 square feet of warehouse
space prior to the renewal of the current lease.  The memorandum
is expected to be issued by February 28, 1997.
 
  Auditor Comments.  Management's comments are responsive to the
recommendation.
 
  Recommendation 3.  Require the Director, Logistics Management
Division, Office of Administrative Services, at Department
Headquarters to:
 
      Dispose of excess furniture, assess and justify the 
      retention of furniture awaiting repair or rehabilitation, 
      and dispose of unneeded specialty furniture.
   
      Relinquish its two warehouse annexes back to GSA and
      consolidate into a single warehouse, as quickly as 
      possible, in line with the downsizing efforts ongoing 
      at the Department.
 
  Management Comments.  Concur in principle.  Management stated
that excess furniture will continue to be processed through GSA
in a timely manner and consistent with established regulations
and agreements.  The Logistics Management Division will develop a
plan to handle furniture excess to the Department's Headquarters
needs and furniture awaiting repair and/or rehabilitation.  This
plan will take into consideration utilization of warehouse space,
the number of individuals being supported, and funding allocated
for repair and/or rehabilitation of furniture.  As a result of a
survey conducted in January 1997, the Logistics Management
Division is in the process of developing a plan for the disposal
of unneeded specialty furniture taking into consideration the
length of time held, regularity of issuance, and utilization of
warehouse space.  These plans are expected to be completed by
November 1997.  Efforts are also being made to relinquish
warehouse space in the two annexes to GSA as quickly as possible.
A reduction of warehouse space is anticipated due to the
downsizing effort of the Department, the Strategic Alignment
Initiative, and a special emphasis on the disposition of
property.  A review will be made of warehouse space, taking into
consideration the plans being developed for the disposal of
furniture, to determine the amount of warehouse space needed by
the Department.  This review is expected to be completed by
December 1997.
 
  Auditor Comments.  Management's planned actions are not
considered responsive to the recommendation.  Taking until
November 1997 to plan how to dispose of unneeded furniture is
unreasonable.  Warehouse space that is not needed should be
relinquished as quickly as possible to minimize leasing costs.
 
  Recommendation 4.  Direct the Manager, Oak Ridge Operations
Office, to:
 
      Establish property records for personal property.
   
      Ensure that an effective system is in place for the
      acquisition, management, control, and disposition of 
      personal property.
 
  Management Comments.  Concur.  The physical inventory of the
Oak Ridge direct operations property over $5,000 and sensitive
property has been completed and effective property records have
been established.  Processes for the acquisition, management,
control, and disposition of Oak Ridge direct operations personal
property are being reviewed as part of the "Business Management
Oversight Process" established in conjunction with DOE
Headquarters.  This process includes self-appraisal, external
reviews, and verifications by Oak Ridge Operations Office and DOE
Headquarters.  These actions will assure that an effective
property management system is in place.  This review will be
completed by February 28, 1997.
 
  Auditor Comments.  Management's comments are responsive to the
recommendation.
                                   IG Report No.  CR-B-97-01
                                                            
                                                            
                                
                                
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