DOD Excess Property: Management Control Breakdowns Result in Substantial Waste and Inefficiency
Published: 2005-05-13T00:00:00

Fast Facts:

Highlights:
section_title: Why GAO Did This Study
paragraphs: Based on limited previous GAO work that identified examples of purchases of new items at the same time identical items in excellent or good condition were excessed, GAO was asked to assess the overall economy and efficiency of the Department of Defense (DOD) program for excess property reutilization (reuse). Specifically, GAO was asked to determine (1) whether and to what extent the program included waste and inefficiency and (2) root causes of any waste and inefficiency. GAO was also asked to provide detailed examples of waste and inefficiency and the related causes. GAO's methodology included an assessment of controls, analysis of DOD excess inventory data, statistical sampling at selected sites, and detailed case studies of many items.
section_title: What GAO Found
paragraphs: DOD does not have management controls in place to assure that excess inventory is reutilized to the maximum extent possible. Of $18.6 billion in excess commodity disposals in fiscal years 2002 and 2003, $2.5 billion were reported to be in new, unused, and excellent condition. DOD units reutilized only $295 million (12 percent) of these items. The remaining $2.2 billion (88 percent) includes significant waste and inefficiency because new, unused, and excellent condition items were transferred and donated outside of DOD, sold for pennies on the dollar, or destroyed. DOD units continued to buy many of these same items. GAO identified at least $400 million of commodity purchases when identical new, unused, and excellent condition items were available for reutilization. GAO also identified hundreds of millions of dollars in reported lost, damaged, or stolen excess property, including sensitive military technology items, which contributed to reutilization program waste and inefficiency. Further, excess property improperly stored outdoors for several months was damaged by wind, rain, and hurricanes. To illustrate continuing reutilization program waste and inefficiency, GAO ordered and purchased at little or no cost several new and unused excess commodities that DOD continued to buy and utilize, including tents, boots, power supplies, circuit cards, and medical supplies. GAO paid a total of $1,471, including tax and shipping cost, for these items, which had an original DOD acquisition cost of $68,127. Root causes for reutilization program waste and inefficiency included (1) unreliable excess property inventory data; (2) inadequate oversight and physical inventory control; and (3) outdated, nonintegrated excess inventory and supply management systems. Procurement of inventory in excess of requirements also was a significant contributing factor. Improved management of DOD's excess property could save taxpayers at least hundreds of millions of dollars annually.

section_title: Letter
paragraphs: This report responds to your request that we assess the overall economy  and efficiency of the Department of Defense (DOD) program for  reutilization (reuse) of excess property.   Your request was based on our  limited previous work that identified several examples of problems in this  area.  Specifically, our November 2003 report identified several examples  that showed that at the same time DOD excessed biological equipment  items in good or excellent condition and sold many of them to the public  for pennies on the dollar, it was purchasing the same or similar items.  In  addition, at a June 2002 hearing on ineffective and inefficient DOD business  processes before the Subcommittee on National Security, Veterans Affairs  and International Relations, House Committee on Government Reform, we  testified that the lack of asset visibility over the Joint Service Lightweight  Integrated Suit Technology (JSLIST) resulted in DOD units sending JSLIST  to Defense Reutilization and Marketing Offices (DRMO) as excess.  DRMOs  then issued coats and trousers to other federal agencies, scrapped some of  these items, and sent other JSLIST to a government liquidation contractor,  while at the same time procuring hundreds of thousands of new garments  in response to the terrorist attacks of September 11, 2001.  You were  concerned that our limited examples could indicate systemic problems.
Accordingly, you asked us to assess the overall economy and efficiency of  DOD’s excess property reutilization program.  To do so, we reviewed  applicable laws and regulations; DOD policies and procedures; and current  systems, processes, and management controls.  Where we found controls  to be ineffective, we tested and evaluated them further.  You asked us to  report (1) whether and to what extent we found waste and inefficiency and  (2) the root causes of any waste and inefficiency.  In reporting on the  results of our work, you asked us to provide detailed examples of any  waste and inefficiency and the related causes.  As agreed with your offices,  our audit focused on identifying new, unused, and excellent condition  excess commodity inventory activity during fiscal years 2002 and 2003  and determining whether the Defense Logistics Agency (DLA) purchased  identical items instead of reutilizing the available excess items in Defense  Reutilization and Marketing Service (DRMS) inventory.
To identify potential waste and inefficiencies, we analyzed the universe of  recorded fiscal year 2002 and 2003 transactions on excess DOD commodity  turn-ins and disposals and DLA commodity purchases.  We compared DOD  reutilization of excess new, unused, and excellent condition commodities  to transfers, donations, public sales, and destruction of excess  commodities.  We also compared DOD commodity purchases to identical  excess items in new, unused, and excellent condition to determine whether  DOD made unnecessary purchases instead of reutilizing available excess  items.  To determine the causes of identified waste and inefficiency, we  tested and evaluated controls for assuring the reliability of data and  information used for reutilization decision making and safeguarding excess  property.  We also assessed the effectiveness of current and planned supply  and excess inventory management systems and processes for reutilization  of excess property.
You also asked us to illustrate the details of our analysis of fiscal year 2002  and 2003 waste and inefficiency by identifying specific examples and  performing case study investigations of the details of these examples.  In  addition, you asked us to purchase and requisition, as case studies,  selected excess items that DLA was continuing to purchase, the military  services were continuing to utilize, or both.
To assure ourselves that DOD data were sufficiently reliable for the  purpose of our audit, we compared database totals to information in  official agency reports, electronically checked control totals and the  completeness of key data elements, and statistically tested the accuracy of  excess inventory data that are key to the excess property reutilization  program.  We conducted our work from November 2003 through February  2005 in accordance with U.S. generally accepted government auditing  standards.  We performed our investigative work in accordance with  standards prescribed by the President’s Council on Integrity and Efficiency.   A detailed discussion of our objectives, scope, and methodology is  presented in appendix I.  We requested comments on a draft of this report  from the Secretary of Defense or his designee.  Written comments from the  Acting Under Secretary of Defense for Logistics and Materiel Readiness are  reprinted in appendix II.
subsections: section_title: Background
paragraphs: DLA is DOD’s combat support agency under the supervision, direction,  authority, and control of the Under Secretary of Defense for Acquisition,  Technology, and Logistics.  DLA’s mission is to provide best-value logistics  support to America’s armed forces, in peace and in war, around the clock,  and around the world.  In carrying out its mission, DLA manages inventory  valued at about $83 billion, consisting of more than 5 million consumable  (expendable) items, including commodities such as fuel, food, clothing and  other textiles, medical supplies, industrial use items, and spare and repair  parts supporting over 1,400 weapon systems.  DLA also buys and  distributes hardware and electronic items that are used in maintenance and  repair of equipment and weapons systems.  In fiscal years 2002 and 2003,  DLA expenditures related to sales and services amounted to over $46.5  billion, including about $36 billion for commodity purchases and about  $600 million for DRMS excess property disposal services.  DLA and DRMS  operate under the Defense-wide Working Capital Fund.  DLA is financed  through user charges to cover costs, and DRMS is financed through user  charges and excess property and scrap sale proceeds.  DLA activities  related to this report fall into two main areas:  (1) commodity acquisition  and management and (2) excess property disposals by DRMS and DLA- managed supply distribution depots (referred to as DLA supply depots).
subsections: section_title: DLA Commodity Acquisition and Management Process
paragraphs: DLA commodity acquisition and management functions discussed in this  report are carried out by three Defense supply centers, which are located in  Columbus, Ohio; Richmond, Virginia; and Philadelphia, Pennsylvania.  The  DLA acquisition process focuses on (1) the acquisition of inventory  requisitioned by customers for immediate use and (2) routine inventory  replenishment. Defense Supply Center item managers initiate commodity  procurements based on military unit requirements for materiel and  supplies and military unit requisitions (supply orders).  Supply center item  managers consolidate the requirements and work with buyers to procure  requested items.  Items for which there are immediate needs are delivered  directly to a military unit by the commercial vendor, and items needed to  support anticipated operations (referred to as the requirements objective)  are stored at DLA supply depots for later issue.  The DLA Defense  Distribution Center uses a total of 26 DLA supply depots located  throughout the United States and Europe, as well as in Guam and Kuwait,  to store commodities and other items that are classified by over 5 million  different NSNs.  This inventory includes commodities, such as clothing and  other textiles; electronics; industrial, general, and construction supplies;  subsistence items; and medical supplies and equipment.  Figure 1  illustrates the DLA commodity acquisition and distribution process.
When there is an urgent customer requirement and items are on back order,  DLA item managers or expediters may check DRMS excess property  inventory and service-level inventory to locate available items to fill an  order.
section_title: Excess Property Disposal Process
paragraphs: The Federal Property and Administrative Services Act of 1949, as  amended, places responsibility for the disposition of surplus government  real and personal property with the General Services Administration  (GSA), which has delegated responsibility for disposal of DOD property to  the Secretary of Defense.  In accordance with federal regulations governing  property management and department policy in DOD 4160.21-M, Defense  Materiel Disposition Manual, DOD agencies and military services are  responsible for determining whether property they hold is considered  excess.  Federal regulations also require executive agencies to ensure that  personal property not needed by their activity is offered for use elsewhere  within the agency.  In accordance with federal regulations, DOD 4160.21-M,  chapter 5, calls for reutilization of excess property to the extent feasible to  fill existing needs and to satisfy additional needs before initiating new  procurement or repair.  All DOD activities are required to screen available  excess assets to identify items that could satisfy valid needs, and the  military services have programs for reutilizing property by redistributing  excess property across their units to meet ongoing operational needs.  DLA  has overall responsibility for property that is excess to military and DOD  units.  DLA has placed responsibility for excess property disposals with  DRMS.
When a military service or DOD agency has property that it no longer  needs, it turns the property over to a DRMS field warehouse location—or  reutilization facility—referred to as a DRMO.  During fiscal year 2004,  DRMS managed 93 DRMOs, including 39 central DRMOs, 54 satellite  DRMOs, and 35 receipt in place locations referred to as RIPLs.  Reported  excess property turn-ins are entered into the DRMS Automated  Information System (DAISY).  DRMS then posts descriptive information  about the excess property to a Web page that lists property that is available  for reutilization by DOD units and specially designated programs, transfer  to federal agencies, and donation to states.  DRMS has two organizational  elements that manage and oversee excess property disposals.  DRMS  National is responsible for daily operations inside the continental United  States.  DRMS International is responsible for daily DRMS activities located  outside the continental United States.  DRMS International has field offices  in Belgium, Germany, Guam, Hawaii, Italy, Japan, Korea, Portugal, Spain,  Thailand, Turkey, the United Arab Emirates, and the United Kingdom, and  it supports the task force in the Balkans.
During fiscal years 2002 and 2003, the military services, DLA supply depots,  and DOD agencies turned in excess commodities with a reported  acquisition value of approximately $31 billion and disposed of excess  property valued at $18.6 billion.  This property included everything from  office equipment, medical supplies, and clothing to scrap from naval ships,  military equipment, and hazardous materials.  The condition of the  property ranges from being well-used or damaged property that has little  value to new, unused items that sometimes are still in the original  manufacturer’s packaging.
DRMS bills DOD units and other federal agencies for disposal services  based on turn-in volume.  DRMS bills the military services and other DOD  agencies a prorated amount for disposal costs net of scrap and liquidation  sale proceeds.  Table 1 shows DRMS’s reported revenue for excess  property disposal services, including billings to the military services.
Turn-ins of excess property are reported on DOD Form 1348, Disposal  Turn-in Document, using a hard copy form that accompanies physical turn- ins of property at DRMOs or electronic reporting.  In accordance with DOD  4160.21-M, Materiel Disposition Manual, upon arrival at a DRMO, excess  items are to be inspected and the item descriptions, quantities, condition  codes, and demilitarization codes are to be verified.  Based on the item type  and condition, a decision is made as to whether the item should be made  available for reutilization.  For excess property in new, usable, or  repairable condition, redistribution from one DOD unit to another allows  the government to make full use of its resources, avoids unnecessary  procurement of property, and results in economy and efficiency of  operations.  Transfers and donations of excess DOD property to special  programs, federal agencies, and states help to conserve their budgetary  resources.  Unusable items are generally sold as scrap.
Department policy in DOD 4160.21-M-1, Defense Demilitarization  Manual, calls for identifying and controlling items that have a significant  military or commercial technology application to prevent improper use or  release of these items outside of DOD.  DOD’s Demilitarization Manual  establishes specific codes that are designed to indicate whether DOD  property is available for reuse without restriction or whether specific  restrictions apply, such as removal of classified components, destruction of  sensitive military technology, or trade security control.  Any residual  excess property that is not reused, transferred, or donated may be sold as  scrap or sent to a landfill or other appropriate site for final disposal.  Figure  2 illustrates the excess property turn-in and disposal process.
Excess DOD property is available for reutilization, transfer, and donation  during a 49-day screening period following turn-in to DRMS.  It may take up  to a week to record excess property receipts into DRMO inventory.  Once  excess property receipts are recorded, DOD units and specially designated  programs may screen for and select items for reutilization.  Special  programs consist of entities that directly support DOD’s mission,  customers that have statutory authorization to receive excess DOD  property, and customers that have been specially designated by DOD to  receive excess property items.  Special programs share screening priority  with DOD, and DRMS accounts for special program requisitions of DOD  excess property as DOD reutilization.  A description of the special  programs is included in appendix IV.
If excess property is still available after the DOD and special program  screening period (the end of the first 21 days), the property is made  available for transfer to other federal agencies through the GSA Federal  Disposal System (FEDS) Web site known as GSAXcess for a 21-day period.   Excess DOD property is available to DOD agencies during the GSA federal  agency screening phase.  DOD entities and others can specify their excess  property needs on a “want list” and DAISY and GSA FEDS will send notices  when such property becomes available.  Property that is not reutilized by  DOD or transferred to federal agencies after 42 days is considered surplus  to the federal government and can be donated to state and local  governments and other qualified organizations, or if not donated, it can be  sold to the public after the 49-day screening period has expired.   Government Liquidation, LLC is the DRMS commercial venture partner  (contractor) for liquidation sales of excess property.  Excess property at  DRMOs is transferred to a liquidation contract sales site co-located with a  DRMO.  DLA supply depot excess property to be sold to the public is sent  to one of two national liquidation sales locations.  DLA supply depots  located west of the Mississippi ship their excess property to the Huntsville,  Alabama, liquidation sales location, and DLA supply depots located east of  the Mississippi ship their excess property to the Norfolk, Virginia,  liquidation sales location.  Overseas, DRMOs sell excess property directly  to the public.
section_title: Analysis of Reutilization Program Identifies Billions of Dollars in Waste and Inefficiency
paragraphs: Our analysis of $18.6 billion in fiscal year 2002 and 2003 excess  commodity disposal activity identified $2.5 billion in excess items that  were reported to be in new, unused, and excellent condition (A condition).   Although federal regulations and DOD policy require reutilization of excess  property in good condition, to the extent possible, our analysis showed that  DOD units only reutilized $295 million (12 percent) of these items.  The  remaining $2.2 billion (88 percent) of the $2.5 billion in disposals of A- condition excess commodities were not reutilized, but instead were  transferred, donated, sold, or destroyed.  About $1.6 billion of the $2.2  billion was transferred to other federal agencies and special programs,  donated to states, or sold to the public for pennies on the dollar.  DRMS  sent the remaining $634 million to scrap and other contractors for disposal.   We also found that DOD purchased at least $400 million of identical items  during fiscal years 2002 and 2003, instead of reutilizing available excess  items in A condition.  However, our analysis of transaction data and our  tests of controls for inventory accuracy indicate that the magnitude of  waste and inefficiency could be much greater due to military units  improperly downgrading condition codes of excess items that are in new,  unused, and excellent condition to unserviceable and the failure to  consistently record NSNs needed to identify like items.  To illustrate  continuing reutilization program inefficiencies and wasteful purchases,  during fiscal year 2004 and the first quarter of fiscal year 2005, we obtained  several new and unused excess DOD commodity items that were being  purchased by DLA, were currently in use by the military services, or both.
subsections: section_title: Excess Commodity Items Reported To Be in Unserviceable Condition Accounted for Most of the Disposal Activity
paragraphs: DRMS is responsible for disposing of unusable items, often referred to as  “junk,” as well as facilitating the reutilization of usable items.  As shown in  figure 3, our analysis of DRMS data showed that $15.6 billion of the $18.6  billion in fiscal year 2002 and 2003 excess DOD commodity disposals  consisted of items reported to be in unserviceable condition, including  items needing repair, items that were obsolete, and items that were  downgraded to scrap.  The remaining $3 billion in excess commodity  disposals consisted of items reported to be in serviceable condition,  including $2.5 billion in excess commodities reported to be in A condition  (new, unused, and excellent condition).
Although DOD units reported that $15.6 billion (84 percent) of the excess  commodities disposed of during fiscal years 2002 and 2003 were in  unserviceable condition, DRMS data showed that DOD units had reutilized  over $1.4 billion of these items—an indication that the items were, in fact,  serviceable.  Erroneous reporting of serviceable excess items as  unserviceable hinders efforts at effective reutilization and can result in  lower sales proceeds for items sold to the public.  Although we do not  know the extent of this problem, as discussed later, our statistical tests of  DRMO inventory at five locations identified significant errors related to  excess items that were coded as unserviceable when they were in fact in  new, unused, and excellent condition.
section_title: DRMS Gave Away, Destroyed, or Sold Excess Commodities Reported To Be in New and Excellent Condition
paragraphs: Our analysis of a reported $2.5 billion in fiscal years 2002 and 2003  disposal activity related to excess commodities reported to be in A  condition showed that DOD units reutilized only $295 million of these  items.  As shown in figure 4, the remaining $2.2 billion (88 percent) were  not reutilized, but instead were transferred to special programs and other  federal agencies, donated to states, sold to the public, or destroyed through  demilitarization and scrap contracts.  As noted previously, DOD policy calls  for the reutilization of excess property to the extent feasible and permits  the disposal of unneeded items.   However, the disposal of $2.2 billion in  excess new, unused, and excellent condition items indicates that DOD  bought more items than it needed.
As shown in table 2, during fiscal years 2002 and 2003, DOD transfers of A- condition excess property valued at about $248 million benefited  international governments; state and local governments; other federal  agency programs; and specially designated programs such as DOD’s  Humanitarian Assistance Program, foreign military assistance programs,  and law enforcement agencies.
Our overall analysis identified disposals of over 22 million new, unused,  and excellent condition excess commodity items that were identical to  items that DLA continued to purchase, stock, or both, resulting in waste of  DOD resources.   We investigated the details of more than a dozen of these  disposal transactions.  Table 3 highlights three examples from our case  studies that illustrate waste related to excess commodities in new, unused,  and excellent condition that were transferred or donated outside DOD at  the same time DLA purchased identical items.
In addition to instances where DOD units failed to reutilize excess  commodities in A condition that were instead given away to other entities,  we identified instances where DRMS destroyed these items.  DRMS  destroys or scraps items that are not reutilized or sold.  As illustrated in  figure 4, during fiscal years 2002 and 2003, DRMS destroyed, scrapped, or  used hazardous materials contractors to dispose of excess commodities  valued at about $634 million—about 25 percent of the $2.5 billion reported  acquisition value for disposals of excess commodities in new, unused, and  excellent condition.  The majority of these items—items valued at $473  million—were military technology items, such as circuit cards, power  supplies, and aircraft parts, that are required to be destroyed or  demilitarized pursuant to national security guidelines when they are no  longer needed by DOD.  Some of the destroyed items had remained in  supply inventory for many years and had become obsolete.  However, we  found several instances where items that were destroyed were still being  purchased, used, or both by military units.  The following examples  illustrate the types of A-condition excess items that were destroyed.
Destruction of excess items that required demilitarization.   Examples of excess A-condition items that were destroyed pursuant to  demilitarization requirements included  2,390 aircraft parts valued at $9,119,876, such as rotary wing blades,  rotary rudders, windshield panels, fuel tanks, and pilot protection  armor;  34,070 circuit cards valued at $73,666,720, including 88 circuit cards  related to one NSN valued at $265,565;  1,604 radio sets valued at $10,247,110;  477 power supply units valued at $3,385,580; and   3 plasma display units valued at $263,151.
Our case study investigations showed instances where power supplies and  circuit cards that were still being purchased by DLA, stocked and issued to  military units, or both were sent to a DRMO rather than being returned to  supply inventory.  For example, we found that the Army’s Tank-Automotive  and Armament Command turned in 14 excess circuit card assemblies  valued at $7,806 on May 29, 2003, because the Army had directed the  retirement of its AH-1 Cobra and UH-1 Huey helicopters.  However, the  Navy and some foreign countries have continued to use these helicopters.   The circuit cards are used in the M136 Helmet Sight, a heads-up display, on  the Cobra Helicopter.  The heads-up display permits a pilot to aim the  helicopter’s rockets and the fixed forward firing gun.  The circuit cards  were advertised for reutilization to DOD and foreign military sales  customers.  Because they were not selected for reutilization within the 49- day screening period, they were sent to a demilitarization contractor on  June 8, 2004, for destruction by thermal reduction.
Destruction of excess A-condition commodity items as scrap.  DRMS  also scrapped excess A-condition commodities valued at about $144  million during fiscal years 2002 and 2003 that did not require  demilitarization.  Normally, these items are transferred, donated, or sold if  they are not selected for reutilization within DOD.  However, items that are  not selected for reutilization or transferred, donated, or sold are scrapped.   For example, DRMS scrapped excess new and unused items, such as the  following:  340 computers with a reported acquisition value of $2,929,539,  2,440 bunk beds valued at $341,600,  29 simulators valued at $1,995,500,   567 power supplies valued at $1,683,211, and  29 teleprinters valued at $901,099.
subsections: section_title: Public Sales of New and Unused Excess DOD Commodity Items
paragraphs: As noted in figure 4, 53 percent, or $1.3 billion of the total $2.5 billion in  fiscal year 2002 and 2003 A-condition excess commodity turn-ins, was sold  to the public.  Although liquidation sales of excess commodities are an  appropriate method of disposal when items cannot be reutilized,  liquidation sales of items that are in new, unused, and excellent condition  that could have been reutilized represent significant waste and inefficiency.   Our case study investigations of fiscal year 2002 and 2003 disposals of  excess A-condition commodities found that DRMS sold numerous excess  items at the same time DLA purchased identical items.  Our analysis  showed that DRMS received a total of about $48 million in fiscal year 2002  and 2003 liquidation sales revenue for property valued at $1.3 billion—an  average of about 4 cents on the dollar.  Liquidation contractor officials told  us that about 80 percent of their revenue relates to the sale of items in good  condition.
section_title: Unnecessary Commodity Purchases
paragraphs: Our analysis of fiscal year 2002 and 2003 DLA commodity purchases and  DRMS excess property inventory data identified numerous instances in  which the military services ordered and purchased items from DLA at the  same time identical items—items with the same NSN—that were reported  to be in new, unused, and excellent condition were available for  reutilization.  We found that DOD purchased at least $400 million of  identical items during fiscal years 2002 and 2003 instead of using available  excess A-condition items.  The magnitude of unnecessary purchases could  be much greater because NSNs needed to identify identical items were not  recorded for all purchase and turn-in transactions.  For example, we  determined that DLA buyers and item managers did not record NSNs for 87  percent (about $4.9 billion) of the nearly $5.7 billion in medical commodity  purchases by military units during fiscal years 2002 and 2003.  Further, as  discussed later in this report, improper downgrading of condition codes to  unserviceable could also result in an understatement of the magnitude of  unnecessary purchases.  While our statistical tests found a few instances of  inaccurate serviceable condition codes, most condition code errors related  to the improper downgrading of condition to unserviceable.  Figure 5  shows examples from our analysis of A-condition excess items that were  available for reutilization at the time DLA purchased identical items.
section_title: Fiscal Year 2004 and 2005 Requisitions and Purchases Demonstrate Continuing Waste and Inefficiency
paragraphs: To determine whether the problems identified in our analysis of fiscal year  2002 and 2003 data were a continuing problem, we monitored DRMS  commodity disposal activity in fiscal year 2004 and the first quarter of fiscal  year 2005.  We found that DOD continued to transfer, donate, and sell  excess A-condition items instead of reutilizing them.  To illustrate these  problems we requisitioned several excess new and unused items at no cost  and purchased other new and unused commodities at minimal cost. We  based our case study selections on new, unused items that DOD continued  to purchase.  We inspected excess items or called warehouse personnel to  confirm they were new and unused.  We used FEDLOG data and  interviewed supply inventory item managers to confirm that the items were  still being purchased, used, or both by the military services.
subsections: section_title: Case Study Requisitions of New and Unused DOD Commodities
paragraphs: To illustrate waste and inefficiency associated with transfers and donations  of excess A-condition commodities to entities outside of DOD, we used the  GSA Federal Disposal System, available to all federal agencies, to  requisition several new and unused excess DOD commodity items,  including a medical instrument chest, two power supply units, and two  circuit cards, at no charge.  These items had an original DOD acquisition  cost of $55,817, and we paid only $5 shipping cost to obtain all of them.  We  obtained these items from two DRMOs and a DLA supply depot.  The  following discussion presents the details of our case study requisitions.
Medical instrument chest.  We requisitioned at no cost a new, unused  medical instrument chest with a reported acquisition cost of $784 from the  Lewis DRMO in Fort Lewis, Washington.  When we visited the Lewis DRMO  to screen for and tag new, unused items, a DRMO official told us that about  20 percent of the Lewis DRMO receipts are new, unused items.  The  medical instrument chest that we obtained was one of 16 excess medical  chests turned in by the Fort Lewis Army Medical Hospital on May 6, 2004.   At the time of our requisition on June 2, 2004, the Army, Navy, and Air  Force medical logistics commands were continuing to purchase these  medical chests from DLA.
The excess DOD medical instrument chest that we requisitioned is  designed for maximum support of deployed medical personnel.  For  example, the chest is designed to store medical instruments and protect  them during shipment as well as to provide shelves and tables for use  during surgery and other medical procedures in the battlefield.  Figure 6 is  a photograph of the excess DOD medical instrument chest assembled for  maximum use.
Circuit cards.  On September 7, 2004, we requisitioned two circuit cards  with a total original acquisition cost of $8,684, from the Hill DRMO.  We  paid $5 shipping cost and received the circuit cards on September 27, 2004.   Circuit cards are circuit boards consisting of a series of flat plastic or  fiberglass layers (usually 2 to 10) that are glued together after a circuit has  been etched in them.  In a computer, a circuit card holds the integrated  circuits and other electronic components that provide power to perform  certain designated functions, such as computerized program functions or  electronic communications functions.  According to the Navy inventory  item manager and the National Security Agency technical support team  leader, the circuit cards that we obtained are used in secure satellite  communications gear.
The circuit cards that we obtained were turned in by the DLA supply depot  in Ogden, Utah, as excess to Air Force needs in February 2004.  The Navy  item manager told us that although the circuit cards were no longer being  purchased, they were still in active inventory and were still being used by  some Navy units and foreign military sales customers at the time we  obtained them.  Our Chief Technologist inspected the circuit cards and  confirmed that they included communications circuitry and were in new,  unused condition.  Figure 7 is a photograph of one of the circuit cards we  requisitioned.
Power supply units.   We requisitioned, at no cost, two high-cost power  supply units from the DLA supply depot in Norfolk, Virginia—one with a  reported acquisition cost of $24,797 and another with a reported  acquisition cost of $21,552—a total of $46,349.  We received one power  supply unit on September 30, 2004, and the other power supply unit on  October 6, 2004.  According to the manufacturer, these power supply units  are part of a super-high-frequency electronics surveillance system, which is  designed to listen and identify radio frequencies. The power supply units  convert AC power to DC voltage to provide power to the assemblies inside  the surveillance system.
We contacted the Navy inventory control point program manager to inquire  about the use of the power supply units that we had identified.  The  program manager explained that both of the power supply units are  currently used in the electronic warfare system of the Seawolf fast attack  nuclear submarine.  The Navy official stated that although DLA is not  currently purchasing these items due to a planned upgrade in technology,  the Navy has a very small number of these power supply units in inventory  and the items remaining at the DLA supply depot should not have been  excessed because they may be needed before the technology upgrade is  completed.  Our Chief Technologist inspected the excess DOD power  supply units we obtained and confirmed that they had never been used.   Figure 8 is a photograph of one of the power supply units that we obtained.
In addition to using the GSA process available to federal agencies to obtain  excess DOD property at no cost, we also purchased, at minimal cost,  several excess DOD commodity items in new and unused condition over  the Internet at govliquidation.com—the DRMS liquidation contractor’s Web  site.  The items we purchased included tents, boots, three gasoline  burners (stove/heating unit), a medical suction apparatus, and bandages  and other medical supply items with a total reported acquisition cost of  $12,310.  We paid a total of $1,466 for these items, about 12 cents on the  dollar, including buyer’s premium, tax, and shipping cost.  The following  examples illustrate the results of our case study investigations and  purchases.
New, unused extreme cold weather boots.  On September 30, 2004, we  purchased several pairs of excess new, unused extreme cold weather boots  over the Internet at govliquidation.com.  The sales advertisement listed an  acquisition cost of $3,900 for approximately 30 pairs of the boots.  We paid  a total of $483, including buyer’s premium, tax, and transportation cost, to  acquire the extreme cold weather boots.  According to a Stockton DRMO  official, the boots were found at the DRMO without identifying paperwork,  and DRMO personnel entered them in excess property inventory in April  2004.  The boots were advertised as being in H condition (unserviceable,  condemned condition).  However, the photograph on the  govliquidation.com Web page showed that the manufacturer’s product label  was still tied to the laces of the boots and that the soles of the boots had no  wear, indicating that they had not been worn.  When we received the boots  on October 12, 2004, we determined that we had, in fact, purchased a total  of 42 pairs of cold weather boots of which 37 pairs were in new, unused  condition.  We paid about $12 per pair for the 42 pairs of boots, which have  a listed acquisition cost of $135 per pair.
Shortly after we purchased the excess cold weather boots, the DLA item  manager told us that she recently placed an order with the vendor to  purchase 31,420 pairs of these same boots, including 1,360 of the sizes of  boots that we purchased.  Further, the DLA technician responsible for  these boots told us that the boots have a shelf life of up to 15 years.   According to the DLA technician, the boots should be inspected after the  first 5 years and then inspected every 2 years after that for a total of six  inspections in 15 years.  After 15 years from date of manufacture these  boots would have surpassed their useful life.  All of the boots we purchased  were less than 5 years old.  The DLA technician told us that none of these  boots have been recalled, and they are considered excellent boots that are  rated to 60 degrees below zero.  Figure 9 is a photograph of the new,  unused excess DOD boots that we purchased.
Shelter Half-tents.  We purchased several new, unused shelter half-tents  over the Internet from govliquidation.com on August 26, 2004.  We paid  $548, including buyer’s premium, tax, and shipping cost, to acquire the  excess DOD shelter half-tents, which had a listed acquisition value of  $2,122.  Shelter half-tents can be carried by individual soldiers and must be  joined together to form a tent that will house two soldiers.  The tents were  listed in H condition (unserviceable, condemned condition).  However, the  advertisement on the liquidation contractor’s Web page stated that some of  the tents were new and in original boxes, and the photograph on the sales  Web page showed that most of the tents were in the original manufacturer’s  packages.  Upon receipt of the tents, we determined that we had, in fact,  purchased 21 new, unused tents and 6 additional tents that were used, but  appeared to be in good condition.  At the time we purchased the shelter  half-tents, the DLA item manager told us that none remained in stock.  DLA  data showed that the Defense Supply Center, Philadelphia, placed an order  for 35,000 of these tents at a cost of about $2.5 million.  Figure 10 is a  photograph of one of the new, unused excess DOD shelter half-tents that  we purchased over the Internet at govliquidation.com.
Gasoline burner units.   On September 30, 2004, we purchased three new,  unused excess DOD gasoline burner units over the Internet from  govliquidation.com.  We paid $164, including buyer’s premium, tax, and  shipping cost, to acquire the gasoline burners, which had a listed  acquisition value of $1,857.  The gasoline burners, which were turned in as  excess by the California Army National Guard in San Luis Obispo,  California, were advertised as “still in box, have never been used.”   According to the DLA item manager, a gasoline burner unit can be used on  the battlefield as either a heat source or as a stove for cooking.  The item  manager told us that the units also could be used as stand-alone  field/camping stoves, but would need a grate, or cooking surface over the  burner.  The item manager explained that DLA purchased thousands of  these units several years ago, and they are continuing to be issued from  supply inventory and used by deployed troops.  According to item manager  data, DOD units purchased 471 of these same gasoline burner units from  DLA in fiscal year 2004.  The item manager told us that there are currently  9,500 of these units in inventory and provided data that showed DLA has  continued to issue gasoline burners to military units.  Figure 11 is a  photograph of one of the new, unused excess DOD gasoline burner units  that we purchased over the Internet from govliquidation.com in September  2004.  At the end of our audit in February 2005, we noted continuing  liquidation sales of excess DOD gasoline burner units.
Portable oropharyngeal suction apparatus.  On October 7, 2004, we  purchased a new, unused portable suction apparatus for the minimum bid  of $35.  We paid a total of $105 for the suction apparatus, including buyer’s  premium, tax, and shipping, compared to the acquisition cost of $1,141.   The suction apparatus runs on electrical or battery power and is designed  for use in aspirating blood and other fluids in emergency treatment of  unconscious or injured personnel in desert, tropic, or artic environments.   The suction apparatus, which was turned in as excess by a U.S. Air Force  Reserve unit at the March Air Reserve Base in Riverside, California, was  coded as being in F condition (unserviceable, repairable condition).   However, the photograph of the suction apparatus showed the tubing to be  sealed in the original package—indicating that the suction apparatus had  not been used.  Documentation we obtained from the DLA item manager  showed that during fiscal year 2004, DLA purchased 627 of these same  suction apparatuses, with a total acquisition cost of $490,439, for issue to  military units.  Our in-house medical expert inspected the suction  apparatus and confirmed that it had not been used.  He said that the design  has not changed for many years, and the only issue with regard to  serviceability would be whether the battery needed to be replaced.  We  determined that the batteries in the unit that we purchased still had a  charge, and the unit was operational.  Figure 12 is a photograph of the new,  unused excess DOD portable suction apparatus that we purchased.
section_title: Management Control Breakdowns Resulted in Reutilization Program Waste and Inefficiency
paragraphs: The $2.2 billion in DOD waste and inefficiency that we identified stemmed  from management control breakdowns across DOD.  We found key factors  in the overall DRMS management control environment that contributed to  waste and inefficiency in the reutilization program, including (1) unreliable  excess property inventory data; (2) inadequate DRMS oversight,  accountability, physical control, and safeguarding of property; and  (3) outdated, nonintegrated excess inventory and supply systems.  In  addition, for many years, our audits of DOD inventory management have  reported that continuing unresolved logistics management weaknesses  have resulted in DOD purchasing more inventory than it needed.  Our  analysis of fiscal year 2002 and 2003 excess commodity turn-ins showed  that $1.4 billion (40 percent) of the $3.5 billion of A-condition excess items  consisted of new, unused DLA supply depot inventory.
subsections: section_title: Unreliable Data Impair the Economy and Efficiency of the Reutilization Program
paragraphs: Our statistical tests of excess commodity inventory and our case studies,  screening visits, and interviews lead us to conclude that unreliable data are  a key cause of the ineffective excess property reutilization program.  GAO’s  internal control standards require assets to be periodically verified to  control records.  In addition, DRMS policy requires DRMO personnel to  verify turn-in information, including item description, quantity, condition  code, and demilitarization code, at the time excess property is received and  entered into DRMO inventory.  However, we found that DRMS management  has not enforced this requirement.  Further, Army, Navy, and Air Force  officials told us that unreliable data are a disincentive to reutilization  because of the negative impact on their operations.  DLA item managers  told us that because military units have lost confidence in the reliability of  data on excess property reported by DRMS, for the most part, they have  requested purchases of new items instead of reutilizing excess items.   Military users also cited examples of damage to excess items during  shipment that rendered the items unusable.  In addition, other reutilization  users advised us of problems related to differences in quantities and the  types of items ordered and received that could have a negative impact on  their operations.
subsections: section_title: Types of Inventory Errors
paragraphs: Our statistical tests found significant problems with controls for assuring  the accuracy of excess property inventory.  Overall error rates for the five  DRMOs we tested ranged from 8 percent at one DRMO to 47 percent at  another, and error rates for the five DLA supply depots we tested ranged  from 6 percent to 16 percent, including errors related to physical existence  of turn-ins and condition code.  Our physical existence tests included  whether a turn-in recorded in inventory could be physically located, timely  recording of transactions, and verification of item description and quantity.
Table 4 shows the overall results of our statistical sampling tests at five  DRMOs and five DLA supply depots.  The specific criteria we used to  conclude on the effectiveness of DRMO and DLA depot inventory controls  at the tested locations are included in appendix V.
Key types of data reliability errors that we found include the following.
Existence errors.  Missing turn-ins in our statistical sample included  entire turn-ins of excess commodity items, such as sleeping bags, cold  weather clothing, wet weather parkas, chemical and biological  protective suits, a computer, and monitors.  DRMO officials could not  locate documentation to show whether the missing turn-ins had been  reutilized, transferred, sold, or destroyed.  Because many items from our  statistical sample could not be found, the issue of lost, missing, and  stolen property is significant, as discussed later.
Quantity errors.  Separate from missing turn-ins, quantity errors  involved items that exceeded or fell short of quantities recorded on a  turn-in transaction.  Shortages represent items that appeared to be  available but were missing.  Because DRMO personnel do not always  verify quantities at the time excess items are received and recorded into  excess inventory, they cannot determine whether missing quantities are  errors or if they represent items that are lost, missing, or stolen.   Quantity shortages included cold weather, wet weather, and camouflage  clothing; field packs; chemical and biological protective suits and  gloves; and computer keyboards.
Lack of timely transaction recording.  DRMO personnel did not always  record transactions to reflect events, such as changes in warehouse  location and shipments to customers or disposal contractors within 7  days.  Based on our screening and inventory testing experience, when  time is wasted looking for such items, customers can become frustrated,  leading to possible loss of future orders.  Excess property users told us  that they spend a lot of time visiting DRMO warehouses to locate and  inspect excess items before they submit requisitions for them.
Inaccurate item descriptions.  Our statistical sample identified several  turn-in transactions involving items that were different from the types of  items recorded in the inventory records.  Item description errors  included erroneous item names and stock numbers.  For example, we  found three instances at one DRMO where turn-ins of computer  keyboards were listed in excess inventory records as speakers and one  instance at another DRMO where speakers were recorded as keyboards.   Our sample also identified one women’s coat and one men’s coat that  were recorded in excess inventory as two women’s coats and items that  were recorded as wet weather trousers and camouflage trousers when  the turn-in boxes contained multiple items, including wet weather  trousers and parkas, camouflage pants, shirts, and coats, and flyer’s  coveralls.  When batched items are recorded as one type of item, only  the NSN for those items is listed in inventory.  As a result, a customer  could order what he or she believed to be the listed quantity of the  named item but instead receive various quantities of multiple types of  items.
Inaccurate condition coding.  Our statistical sample found condition  code error rates that ranged from 5 percent at one DRMO to 22 percent  at two other DRMOs that we tested.  We based our determinations of  condition coding accuracy on physical observation of condition with  regard to the broad categories of serviceable and unserviceable rather  than testing specific coding within these categories, which could have  resulted in an even higher error rate.  Our sample identified numerous  examples of new, unused excess inventory items that were incorrectly  coded as being in unserviceable condition, including cold weather  boots, cold weather undershirts, military trousers, women’s blue dress  uniforms, compressor parts kits, wet weather parkas, and fragment  body armor.  In addition to items in our statistical sample, we observed  numerous other new, unused items in DRMO warehouses and at  liquidation sales locations that were coded as unserviceable, including  desert combat boots, camouflage clothing, computer equipment, and  aircraft parts.  Accurate condition codes are key to an effective excess  property reutilization program because DOD units generally look for  new, unused excess items for reutilization.
section_title: Causes of Inventory Errors
paragraphs: We found that unreliable excess property inventory data are the result of  breakdowns in controls for proper recording and verification of inventory  transaction data.  The control breakdowns we identified related to four  major areas:  (1) the failure of DRMO personnel to verify excess property  turn-ins at the time they are received and entered into excess inventory  records; (2) improper downgrading of condition codes by DOD units;  (3) the inconsistent use of NSNs; and (4) human capital issues related to  DRMO staffing and workload and military service procedures, training, and  oversight of excess property reporting.
Failure to verify turn-ins and correct errors.  The errors in excess  inventory identified in our statistical samples, screening observations, and  case studies were caused by inaccurate turn-in documentation submitted  by military unit turn-in generators and the failure of DRMO personnel to  inspect excess items, verify turn-in documents, and correct identified  errors.  DRMS policy requires DRMO personnel to inspect excess items  upon receipt and challenge or change incorrect data.  However, DRMO  personnel told us that they were not able to verify excess property receipts  when faced with large turn-in volumes and processing backlogs.  Further, a  provision in this same policy allows DRMO managers who are faced with  heavy turn-in volume to waive the requirement to verify quantity counts, if  the time required to count the property is not justified, and instead use  turn-in generator counts.  The policy limits exceptions to (1) batched turn- ins of multiple types of items, (2) large quantities of small items in other  than the original package, and (3) large quantities of items in the original  package where box counts can be used.  However, officials at two of the  five DRMOs we tested—the DRMOs with the highest data reliability error  rates—cited this policy and told us that they accept turn-in generator  information and do not verify excess property turn-in data.
In addition, our statistical sample identified one instance where DRMS  headquarters officials did not provide guidance on how to correct  erroneous turn-in documentation related to a June 30, 2004, Navy turn-in of  six new, unused Level III biological safety cabinets with a total acquisition  cost of $120,000.  The Navy unit improperly used a local stock number  (LSN) to describe the safety cabinets on the turn-in document and a  demilitarization code that indicated there were no restrictions on the  disposal of these items.  However, Level III safety cabinets are subject to  trade security controls, and therefore, they are required to be identified by  an NSN or other information which accurately describes the item, the end  item application, and the applicable demilitarization code.  Although  Norfolk DRMO personnel advised DRMS officials of the need to correct the  turn-in document errors in July 2004, at the time we finalized our draft  report in early February 2005, DRMS had not taken action to authorize the  DRMO to correct these errors so that the safety cabinets could be identified  for reutilization within DOD.  Further, we found that as of the end of our  audit in February 2005, the safety cabinets had not been posted to the  DRMS reutilization Web page as excess property available for reutilization.   Figure 13 shows a photograph of one of the Level III cabinets.
Improper downgrading of condition codes.  The incorrect recording of  unserviceable condition codes for items that are in serviceable condition,  particularly items in new, unused condition, makes it unlikely that they will  be selected for reutilization.  For example, all of the new, unused excess  DOD commodity items that we purchased over the Internet were  incorrectly coded as unserviceable.  As noted previously in our case study  discussions, all of the items that we purchased were items that military  units continued to purchase, use, or both.  As shown in table 5, our DRMO  tests found that most errors related to items that were incorrectly reported  to be in unserviceable condition.
As shown in table 5, we found numerous instances where DOD units  improperly downgraded the condition codes of items that were no longer  serviceable to them, either because they did not want these items or  because the items were being replaced by new technology, even though in  many cases these items were new and unused.  Our statistical tests and our  case studies showed that many times the items that military units coded as  unserviceable were serviceable and very adequate for use by others.
Inconsistent recording of NSNs.  The failure to consistently record  NSNs to commodity purchase and excess inventory records prevents the  identification of like items for reutilization and, therefore, may result in  unnecessary purchases.  Although DLA records NSNs for most purchases  that are stored in DLA supply depot inventory, it does not record NSNs for  items purchased from prime vendors for direct delivery to DOD  customers.  For example, as noted previously, we determined that DLA  buyers and item managers did not record NSNs for 87 percent of the nearly  $5.7 billion in medical commodity purchases by military units during fiscal  years 2002 and 2003.  According to DLA officials, prime vendor catalogs  identify products by part number or model number rather than NSN.  This  issue will become more significant as DLA expands its use of prime  vendors to other commodity groups.
The failure to record NSNs to turn-in transactions prevents item managers  from identifying these items for reutilization at the time purchase decisions  are made.  For example, our in-house scientists who often meet with DOD  scientists at the U.S. Army Biological Warfare Research Center at the  Dugway Proving Ground learned that the DOD scientists were planning to  purchase a Level III safety cabinet and informed them of the availability of  the six Level III safety cabinets at the Norfolk DRMO.  The DOD scientists  told us that they were unaware the Navy had excessed the safety cabinets  and said that they could use all six of them.  We subsequently confirmed  that the DOD scientists at Dugway had requisitioned the six Level III safety  cabinets for reutilization.
Our analysis showed that LSNs were recorded for about 41 percent of fiscal  year 2002 and 2003 excess property turn-ins.  LSNs are appropriate  identifiers for local purchases and one-of-a kind items.  However, our  statistical samples and case studies showed that military unit turn-in  generators had recorded LSNs to items that should have been identified  with NSNs to avoid the time and effort necessary to identify and record  NSNs.  For example, LSNs were recorded for excess military clothing in  our Columbus DRMO sample and the cold weather boots that we  purchased over the Internet even though these items have labels that  showed the assigned NSNs.
DOD has efforts under way to promote the use of unique product  identifiers other than NSNs by commercial vendors and small business  firms.  Regardless of the mechanism used to identify standard items, to  assure an effective excess property reutilization program, DOD will need to  consistently record NSNs, product numbers, or other unique item  identification in its purchase, supply, and excess inventory records.
Human capital weaknesses.  We found that human capital issues related  to imbalances between staffing and workload at DRMOs and inadequate  training of military turn-in generators contributed to unreliable data and  associated waste and inefficiency.  Based on our interviews of DRMO  officials, our statistical tests of DRMO inventory, and our review of  available DRMS workload data for the five DRMOs we tested, we  concluded that data reliability was directly affected by the availability of  DRMO staff qualified to process excess property receipts.  For example,  DRMS data for the last 8 months of fiscal year 2004 showed the three  DRMOs we visited that attempted to verify turn-in documentation— Norfolk, Hill, and Stockton—experienced backlogs in receipt processing  and significant use of overtime hours.  In contrast, we found that the two  DRMOs that did not verify receipts worked few, if any, overtime hours and  had significantly fewer backlogs than the other three DRMOs.  As noted  previously, these two DRMOs also had high excess property inventory error  rates.
We also found a lack of detailed guidance on the proper assignment of  condition codes.  DRMS condition code guidance consists of a list of supply  and disposal condition codes and brief definitions of each condition code.   DRMS has not developed detailed narrative guidance with explanations  and examples of how to apply these codes.  However, we also found that  the military services are not correctly using the listed supply and disposal  condition codes on their excess property turn-in documents.  For example,  when military units assigned supply condition codes indicating that new,  unused items were unserviceable or condemned, they also used the  disposal condition code for repairable, rather than the code for new,  unused.  Military units had differing views about whether unserviceable  condition meant that items were unserviceable for their purposes or  unserviceable to anyone.  As a result, we found that items in the same  condition would be coded serviceable by one military unit and  unserviceable by another.  In addition, our analysis of turn-ins of  unserviceable items found a lack of training, guidance, and supervision at  one Navy unit.  For example, Navy officials at the North Island Naval  Aviation Depot told us that the employee responsible for sending their  excess property to the DRMO had never received formal training on  disposal policies and procedures.  Further, the officials told us that they did  not have any manuals or written procedures that explained excess property  turn-in procedures.  As a result, the employee assigned condition codes H  (unserviceable, condemned) or S (scrap) to all excess property turn-ins.
We contacted GSA’s Director of Personal Property Management Policy to  discuss the proper assignment of federal agency condition codes.  The GSA  Policy Director explained that DOD uses unique supply condition codes  that are a combination of federal agency codes established by GSA and its  own codes for identifying serviceable and unserviceable property.  (App. III  lists and defines the GSA and DOD condition codes.)  The GSA Director  told us that unreliable federal agency condition codes, including DOD  condition codes, have presented a problem in GSA’s program for utilization  of excess federal agency property within the federal government.  For  example, he noted that federal agency officials have told GSA that they  cannot rely on condition codes assigned to excess property, and this had an  impact on the effectiveness of GSA’s efforts to promote the use of excess  DOD property within the federal government.
We also found that the condition codes established by GSA do not provide  for the identification of items that are nearly new, with little or no evidence  of use.  Because such items are not new and unused, they would be coded  the same as items that may be well used and need minor repair.  Further,  the GSA codes do not provide for identification of items that are new and  unused but technically obsolete to the current owner.  The GSA Policy  Director noted that because of the federal government’s increased reliance  on technology, the need to identify obsolete items is becoming a  governmentwide excess property disposal issue.  He said that GSA would  be willing to work with DOD and other federal agencies to develop a  solution to these problems.
section_title: Weaknesses in Reutilization Program Oversight and Physical Inventory Control
paragraphs: We found hundreds of millions of dollars in potential waste and inefficiency  associated with the failure to safeguard excess property inventory from  loss, theft, and damage.  As previously discussed, our statistical tests of  excess commodity inventory at five DRMOs and five DLA supply depots  identified significant numbers of missing items.  Because the DRMOs and  DLA supply depots had no documentation to show that these items had  been requisitioned or sent to disposal contractors, they cannot assure that  these items have not been stolen.  According to DRMS data, DRMOs and  DLA supply depots reported a total of $466 million in excess property  losses related to damage, missing items, theft, and unverified adjustments  over a period of 3 years.  However, as discussed below, we have indications  that this number is not complete.  Also, because nearly half of the missing  items reported involved military and commercial technology that required  control to prevent release to unauthorized parties, the types of missing  items were often more significant than the number of missing items.
subsections: section_title: Excess Property Losses
paragraphs: Weaknesses in accountability that resulted in lost and stolen property  contributed to waste and inefficiency in the excess property reutilization  program.  As shown in table 6, our analysis of reported information on  excess property losses at DRMOs and DLA supply depots found that  reported losses for fiscal years 2002 through 2004 totaled $466 million.   Because 43 percent of the reported losses related to military technology  items that required demilitarization controls, these weaknesses also  reflect security risks.  GAO Standards for Internal Control in the Federal  Government  requires agencies to establish physical control to secure and  safeguard assets, including inventories and equipment, which might be  vulnerable to risk of loss or unauthorized use.  However, our statistical  tests of excess commodity inventory at five DRMOs and five DLA supply  depots during fiscal year 2004 identified missing items involving entire  turn-ins of some excess items as well as fewer items than reported in  inventory (missing quantities) for other turn-ins.  We referred locations  with high occurrences of reported losses to our Office of Special  Investigations for further investigation.  Table 6 shows reported losses for  fiscal years 2002 through 2004.
DRMO losses.  Our statistical samples identified missing turn-ins at two of  the five DRMOs we tested and missing quantities at all five DRMOs tested,  including many items that were in new, unused, and excellent condition.   Because DRMO officials did not have documentation to show whether  these items had been reutilized, transferred, sold, or destroyed, there is no  assurance of whether the missing items reflected bookkeeping errors or if  they related to theft.  Missing items in our Columbus DRMO sample  included turn-ins of 72 chemical and biological protective suits and 47 wet  weather parkas that were subject to demilitarization controls and 7  sleeping bags, a cold weather coat, 4 pairs of cold weather trousers, 4  canteens, a central processing unit (CPU), and various other items.  Most of  the quantity errors we found at the Columbus DRMO related to military  clothing items.  Missing items in our Richmond DRMO sample included a  computer; 10 CPUs; 13 computer monitors; 2 scanners; and 2 items that  require trade security control, including an arm assembly for a helicopter  blade and a computer data signal coder/decoder.
Based on these losses, we requested DRMS summary reports on losses for  all DRMOS during fiscal years 2002, 2003, and 2004 for further analysis.   Reported losses include lost, damaged, and stolen items and adjustments  for recordkeeping errors.  We determined that the loss summary reports do  not include all known losses.  For example, only one of the nine turn-ins in  our statistical sample that included missing items that were subject to  demilitarization controls was included in the fiscal year 2004 loss summary  reports.  Further, missing quantities are generally reported as adjustments  rather than lost or stolen items.
According to DRMS data, of the total $62 million in reported fiscal year  2004 losses, the Warner Robins DRMO reported $22 million and the four  DRMS demilitarization centers reported over $17 million.  In addition,  reported fiscal year 2004 losses at the contractor-operated Meade DRMO  included over 1,000 turn-ins with a reported acquisition value of over $3  million dollars.  Although the DRMO contract provides for fines of $2,500  per incident of loss if negligence is proven, we learned that contractor  negligence could not be proven due to documented security weaknesses at  the Meade DRMO.  Uncorrected security weaknesses leave the Meade  DRMO vulnerable to theft.
Further, while DRMO loss reports require that a reason code be specified,  we found that the reasons for nearly all (99.8 percent) of the reported  DRMO losses for fiscal years 2002 through 2004 related to unknown  reasons (76.6 percent) and unverified adjustments for bookkeeping and  data-entry errors (23.2 percent).  As a result, DRMS has no assurance of the  extent to which theft may have occurred and gone undetected.  In January  2005, DRMS officials told us that they had not yet performed a review of the  excess property loss reports as a basis for identifying and correcting  systemic weaknesses.
Reported DRMO losses for the 3-year period included 76 units of body  armor, 75 chemical and biological protective suits (in addition to those  identified in our Columbus DRMO sample), 5 guided missile warheads,  and hundreds of military cold weather parkas and trousers and camouflage  coats and trousers.  Three DRMOs—Kaiserslautern, Meade, and  Tobyhanna—accounted for $840,147, or about 45 percent, of the nearly $1.9  million in reported fiscal year 2004 losses of military equipment items  requiring demilitarization.
DLA supply depot losses.  Our statistical samples also showed missing  items at four of the five DLA supply depots that we tested.  Because depot  officials did not have documentation showing that these items had been  reutilized or sold, there is no assurance of whether the missing items  related to theft.  Missing items in our DLA depot statistical samples  included the following:    Two classified radio frequency amplifiers, a printed circuit board that is  subject to trade security controls, and a circuit card assembly that  required demilitarization (destruction) when no longer needed by DOD  at DLA’s Norfolk supply depot.
Trade security-controlled aircraft parts, including 17 aircraft landing  gear drag link assemblies, 6 landing gear upper manifolds, and 3 cylinder  and piston units used in aircraft landing gear at DLA’s Hill supply depot.
Six computer controllers and a circuit card used in Army, Navy, and Air  Force communications at DLA’s San Joaquin supply depot.
We also obtained DRMS data on DLA supply depot reports of excess  property losses, including missing and damaged property and unverified  adjustments.  As shown in table 6, reported DLA supply depot losses  totaled $276 million for fiscal years 2002 through 2004.  Of this amount,  nearly $192 million related to excess property items that were subject to  demilitarization and trade security controls.  The summary reports that we  obtained did not identify the reasons for most of the reported DLA supply  depot losses.  According to DRMS data, 18 DLA supply depots reported a  total of $114 million in fiscal year 2004 excess property losses.  Two supply  depots reported 72 percent of these losses, including the DLA Oklahoma  City supply depot with reported losses of 213,950 items totaling $41 million  and DLA’s Warner Robins supply depot with reported losses of 4,911 items  totaling $40 million.  In addition, the San Diego and Tobyhanna DLA supply  depots each reported about $6 million in fiscal year 2004 excess property  losses.  Types of items reported as lost, damaged, or possibly stolen  included aircraft frames and parts, engines, laboratory equipment, and  computers.
section_title: Property Damage
paragraphs: In addition to reported losses, we found significant instances of property  damage at DRMS liquidation contractor sales locations.  Because all  liquidation sales are final, buyers have no recourse when property is  damaged subsequent to sale or is not in the advertised condition.  As a  result, customers who have lost money on bids related to damaged and  unusable items might not bid again, or they may scale back on the amount  of their bids in the future, affecting both the volume of excess DOD items  liquidated and sales proceeds.  The property damage that we observed at  liquidation contractor sales locations is primarily the result of DRMS  management decisions to send excess DLA supply depot property to two  national liquidation sales locations without assuring that its contractor had  sufficient human capital resources and warehouse capacity to process,  properly store, and sell the volume of property received.
Although DRMS headquarters officials were aware of this problem and  made numerous visits to the Huntsville sales location beginning in January  2004, actions taken to address this problem have been inadequate.  In  addition, poorly maintained contractor warehouse facilities at one  liquidation sales location resulted in severe water damage to excess DOD  bandages and medical supply items that we purchased over the Internet at  govliquidation.com.  The DRMS liquidation sales contract and Web page  conditions of sale state that DRMS is responsible for providing and  maintaining the warehouse facilities used by the contractor.
Property damage at the Huntsville, Alabama, liquidation sales  location.   In November 2004, we investigated reports of damage related to  improper outside storage of excess items at the Huntsville, Alabama,  liquidation sales location.  In June 2003, DRMS initiated a recycle control  point  process, referred to as RCP, for DLA supply depots, whereby excess  property remains in the depot warehouses during the reutilization  screening process.  At the end of the screening phase, property that does  not require demilitarization by destruction or mutilation is to be shipped to  one of two liquidation contractor national sales locations—Huntsville,  Alabama, for DLA depots west of the Mississippi River and Norfolk,  Virginia, for DLA depots east of the Mississippi.  We determined that DRMS  continued to send excess DLA supply depot property to the Huntsville sales  location even though it was apparent after the first 6 months of shipments  that the Huntsville location lacked the capacity to handle the large volume  of property received from the DLA depots.  For example, in early June  2004, the Area Manager for the Huntsville DRMO inspected the liquidation  contractor’s warehouses and found that excess property had filled at least  one contractor warehouse building entirely, blocking doors and fire  extinguishers.  The Area Manager advised contractor officials that this  situation would not be viewed favorably during the joint safety, fire, and  environmental inspection anticipated within the near future.  In response,  contractor officials removed sufficient property from the building to meet  fire and safety regulations.  As a result, numerous excess DOD property  items were relocated outside to an unpaved lot about the size of a football  field and covered with a number of blue plastic tarps.  Most of these items  were new and unused spare parts and electronic items received from DLA  supply depots.  In addition, wood furniture and metal file cabinets that  were transferred to the contractor for liquidation sale by the co-located  Huntsville DRMO were stored outside without any protection from the  weather.
According to DRMO officials, DRMS headquarters officials had visited the  Huntsville sales location in March 2004; a second time in June 2004, when  the property was placed on the outside lot; and again in September 2004, to  observe the extent of the overflow.  Despite the known risk of damaged  and lost property, the volume of excess DLA depot property continued until  September 2004, when DRMS headquarters made a decision to divert  shipments from three western DLA supply depots to the Norfolk, Virginia,  liquidation sales location.  However, property continued to be stored  outside until the week of October 18, 2004, when DRMS officials visited the  Huntsville sales location.  By that time, numerous property items had  received extensive damage due to sun, wind, rain, and storms, including  four hurricanes—Charlie, Frances, Ivan, and Jeanne—and tropical storms  Bonnie and Matthew.  DRMS officials disposed of some items and placed  other items inside the warehouse.  In addition, the Huntsville DRMO  manager told us that wood computer furniture and filing cabinets that were  in good condition at the time the DRMO turned them over to the liquidation  contractor had been stored outside unprotected from weather.  Because  most of the furniture was ruined and the filing cabinets were rusted, they  were sent to the landfill or sold as scrap.  Figure 14 shows the outside  location of the wood computer cabinets and other items in July 2004 when  they were advertised for sale.
Our inspection of the remaining damaged property identified numerous  boxes that were missing property labels or had labels and shipping  documentation that were illegible due to exposure to sun, wind, and rain.   The missing documentation presents a significant problem because the  sales contractor does not record receipts of excess DOD property in its  sales inventory until items are processed for sale, which may not occur  until several months after the items are received.  DRMS officials told us  that they are attempting to reconcile excess property shipments to  liquidation contractor inventory.  However, because excess property  receipts were not recorded in sales inventory and property labels are  missing or illegible, it will be very difficult, if not impossible, to fully  reconcile sales inventory to excess property receipts.  The photograph in  figure 15 shows wooden boxes that have lost their property labels and are  turning black due to rot.
Property subject to damage at the Norfolk, Virginia, liquidation  sales location.  On December 2, 2004, we visited the Norfolk liquidation  contractor sales location to determine whether DRMS action to resolve the  capacity problems at the Huntsville sales location by diverting property to  Norfolk, Virginia, had resulted in capacity problems at that location.  We  observed hundreds of cardboard and wooden boxes containing excess  DOD property that were stored outside under blue plastic tarps and in  shrink-wrapped stacks on pallets.  Upon inspection, we noted that many of  the boxes were already water-damaged.  The photograph in figure 16 shows  cardboard boxes stored outside at the Norfolk, Virginia, sales location that  evidence weather damage in terms of peeling property labels and water  marks.
Damage to GAO purchase of bandages and medical supplies.  Our  October 7, 2004, Internet purchase of bandages and medical supplies from  govliquidation.com suffered water damage because DRMS failed to  adequately maintain the liquidation contractor’s Norfolk facilities.  Our  purchase included numerous usable items in original manufacturer  packaging, including 35 boxes of bandages, 31 boxes of gauze sponges and  surgical sponges, 12 boxes of latex gloves, and 2 boxes of tracheostomy  care sets.  We paid a total of $167, including buyer’s premium, tax, and  transportation cost, for these items, which had a reported total acquisition  cost of $3,290.  However, the following week, when we arrived at the  liquidation contractor’s Norfolk, Virginia, sales location to pick up our  purchase, it was raining and the roof on the contractor’s warehouse  building was leaking.  The boxes containing the items we had purchased  had become wet, and water dripped from some of the boxes when  contractor personnel loaded them into our rental truck.  The photograph in  figure 17 illustrates the damaged condition of the items we purchased.   Most of the cardboard storage boxes were deteriorating as a result of water  damage, and items inside the boxes were wet.
Although the sales lot containing the bandages and medical supplies that  we purchased was advertised as 4 pallets of items, it actually consisted of  13 pallets.  The truck we rented would not accommodate all 13 pallets of  items.  The liquidation contractor sales representative told us that we could  take as much as we could accommodate, and the contractor would resell  the remaining items, even though the boxes on the remaining 8 pallets of  bandages and medical supplies were also wet.
We found that customers who find that the property they purchased is  damaged have no recourse.  Further, the liquidation contractor’s terms of  sale provide no incentive for safeguarding property held for sale.  For  example, under the contractor’s terms of sale, all sales are final and items  are sold in “as is” condition.  The liquidation sales contractor disclaims all  warranties, express and implied, without limitation, including loss or  liability resulting from negligence.  Credit card account numbers must be  provided at the time a bid is made, and the sales cost, buyer premium, and  sales tax, if applicable, are immediately charged to the winning bidder.
section_title: Outdated, Nonintegrated Systems Impair Economy and Efficiency
paragraphs: Inefficient, nonintegrated excess inventory and supply management  systems lack controls necessary to prevent waste and inefficiency in the  reutilization program.  For example, because the DRMS Automated  Inventory System (DAISY) and DLA’s Standard Automated Materiel  Management System (SAMMS) are outdated and nonintegrated, they do not  share information necessary to (1) identify and alert DLA item managers of  excess property that is available to fill supply orders and (2) prevent  purchases of new items when A-condition excess items are available for  reutilization.  We have continued to report that long-standing weaknesses  with DLA’s inventory systems related to outdated, nonintegrated legacy  systems and processes result in DOD and military units not knowing how  many items they have and where these items are located.  DLA has  acknowledged serious deficiencies in its automated inventory management  systems. Although DLA has an effort under way to replace SAMMS with the  Business Systems Modernization (BSM) and DRMS has a Reutilization  Modernization Program (RMP) under way to upgrade DAISY, so far these  have been separate, uncoordinated efforts and they do not adequately  address identified process deficiencies.   Also, while the systems  improvement efforts are intended to integrate supply and excess inventory  systems to support the reutilization program, they are not focused on  resolving long-standing problems related to unreliable condition code data  and incomplete data on NSNs.  The accuracy of these two data elements is  critical to the ability to identify like items that are available for reutilization  at the time purchases are made.
subsections: section_title: Current Inventory Systems Environment
paragraphs: We found that existing systems and processes do not adequately reflect the  DRMS twofold mission to (1) facilitate reutilization of property in good  condition and (2) dispose of property that DOD cannot use.  For example,  DRMS moves all excess property through the same 49-day screening and  disposal process rather than identifying A-condition items that are  currently being purchased, stocked and issued, or both to military units and  designating these items for reutilization.  Instead, as previously discussed,  DRMS transferred, donated, sold, and destroyed hundreds of millions of  dollars of A-condition excess items that the military services continued to  purchase and utilize.
In addition, we found that the current process for identifying excess  property that is available to fill supply orders is cumbersome, time- consuming, and involves significant human intervention.  For example,  under the current process, if an item manager wants to use excess items to  fill a supply order, the item manager must query DAISY to determine  whether excess items are available to fill the supply order.  If excess items  are available, the item manager would then need to contact one or more  DRMOs where the excess property is located and ask DRMO personnel to  physically verify the item description, quantity, and condition.  If the excess  items meet the customer’s requirements, the item manager prepares a  requisition form and submits it to the DRMO(s).  If the item does not  require technical inspection or testing, the DRMO processes the order and  ships the excess items to the customer.  However, if the item is electronic  and requires technical inspection and testing, or both, it must be sent to a  DLA supply depot where these functions can be performed before the item  is shipped to the customer.
Military unit officials told us that due to inefficiencies in this process,  including shipment delays of up to several weeks and unreliable DRMS  data on quantities and condition codes, they prefer to order new items  rather than attempting to reutilize excess property available at DRMOs.   Figure 18 illustrates the current nonintegrated DLA inventory systems  environment.
According to DLA officials, the planned BSM and RMP excess property  reutilization systems are intended to be integrated when fully implemented  in 2009.  The objective of the integrated design is to provide DLA buyer and  item manager visibility over excess property available for reutilization and  permit the buyer to fill a supply order with these items instead of  purchasing new items.  However, we are concerned that these efforts may  not resolve the long-standing data reliability problems inherent in the  current systems and processes.  Our November and December 2004  discussions with DLA and DRMS systems officials revealed that they were  unaware of the magnitude of errors in condition coding that incorrectly  recorded new and unused items as unserviceable and the extent of  inconsistent recording of NSNs in commodity purchases and excess  inventory records.   Further, the officials had not yet coordinated to identify  key data elements for identifying excess property that should be reutilized.
We also found that DLA and DRMS systems officials had not yet fully  considered building controls into the new business systems that would  help enforce the policy to reutilize available excess property in new,  unused, and excellent condition before purchasing new items.  For  example, under the current systems environment, item managers and  military units can choose to purchase new items rather than reutilizing  available new, unused, and excellent condition excess items.  In order to  avoid this problem in the planned systems environment, DLA would need  to include edit controls that would reject a purchase transaction or  generate an exception report for review and approval when such items are  available for reutilization but are not selected.
We discussed our concerns with DLA officials.  In early February 2005, DLA  officials told us that they were extending the March 2005 target date for  completing the functional design for excess property reutilization in BSM  and RMP in order to address our concerns about the impact of unreliable  data on the successful integration of the planned systems.
section_title: Conclusions
paragraphs: DLA and DRMS have not demonstrated the leadership and accountability  necessary to achieve the economy and efficiency of excess property  reutilization contemplated in federal regulations or DOD policy.  To  effectively address problems with reutilization program waste and  inefficiency, DRMS and DLA will need to exercise strong leadership and  accountability to improve the reliability of excess property data; establish  effective oversight and physical inventory control, including both  accountability and safeguarding of excess property; and develop effective  integrated systems for identifying and reutilizing excess property.  In  addition, the military services will need to provide accurate information on  excess property turn-in documentation, particularly data on condition  codes, and item descriptions, including NSNs.  Improved management of  DOD’s excess property and a strong reutilization program could help save  taxpayers hundreds of millions of dollars annually.
section_title: Recommendations for Executive Action
paragraphs: We recommend that the Secretary of Defense direct the Director of the  Defense Logistics Agency; the Commander of the Defense Reutilization and  Marketing Service; and the Secretaries of the Army, the Navy, and the Air  Force, as appropriate, to take the following 13 actions to improve DOD’s  excess property reutilization program.
subsections: section_title: Data Reliability
paragraphs: Direct DRMS to clarify and enforce the policy that permits DRMO  management to waive the requirement to verify quantities on turn-ins  under exempted conditions, and consider additional criteria for  maintaining accountability of military equipment items.
Require DRMS to identify DRMOs with insufficient human capital  resources and take appropriate action to assure that excess property  receipts are verified and processed in an accurate and timely manner.  In  implementing this recommendation, DRMS should require DRMOs to  provide adequate supervision and monitoring to assure that excess  property receipts are verified when received and entered in DRMO  inventory.
Require DLA to develop a mechanism for linking prime vendor purchase  transactions to NSNs or other unique product identification.
Direct DRMS to develop written guidance and formal training to assist  DRMO personnel and military service turn-in generators in the proper  assignment of condition codes to excess property turn-ins.
Direct the military services to provide accurate excess property turn-in  documentation to DRMS, including proper assignment of condition  codes and NSNs based on available guidance.
Require the military services to establish appropriate accountability  mechanisms, including supervision and monitoring, for assuring the  reliability of turn-in documents.
section_title: Physical Control of Property
paragraphs: Direct DLA and DRMS to review DLA supply depot and DRMO excess  property loss reports to identify systemic weaknesses and take  immediate and appropriate corrective actions to resolve them.
Direct DRMS to take immediate, appropriate action to resolve identified  uncorrected DRMO security weaknesses.
Require DRMS to determine the monthly sales volume of excess  property at the DLA supply depots and work with its liquidation sales  contractor to identify the appropriate number and liquidation sales  locations needed to handle the sales of excess DLA depot property.  In  making these determinations, DRMS and its contractor should consider  whether contractor staffing and warehouse capacity at each location are  adequate to handle the volume of property shipped to those locations  for sale.
Require DRMS to periodically inspect liquidation contractor facilities  and take immediate action to correct structural impairments and other  deficiencies, such as outside storage due to inadequate warehouse  capacity that could result in damage of excess DOD property held for  sale.
section_title: Commodity Inventory Systems
paragraphs: Direct DLA and DRMS to consider available options and implement an  interim process for identifying turn-ins of excess new, unused, and  excellent condition items that could be reutilized to avoid unnecessary  purchases in the existing systems environment.
Direct DLA BSM and DRMS RMP systems officials to coordinate on the  identification of key data elements for identifying excess property that  should be reutilized before completing the design of functional  requirements for reutilization of excess commodities for BSM and RMP.
Require that DLA’s BSM system design include edit controls that would  reject a purchase transaction or generate an exception report when A- condition excess items are available but are not selected for  reutilization at the time that purchases are made.
section_title: Agency Comments and Our Evaluation
paragraphs: On April 15, 2005, DOD provided written comments on a draft of this  report.  DOD officials concurred with 8 of our 13 recommendations and  partially concurred with the other 5 recommendations.  With regard to the 5  recommendations on which DOD partially concurred, DOD’s stated actions  address all 5 of them.  We view these actions as being generally responsive  to the intent of our recommendations.  The partial concurrences relate to  plans for alternative actions, actions already initiated in response to our  audit, and increased attention to existing processes.  DOD’s explanation for  the partial concurrences and our response follows.
DOD stated that DRMS will use an alternative action to address our  recommendation that it assess the adequacy of human capital resources  and take appropriate action to assure that excess property receipts are  verified and processed accurately and timely.  DOD stated that DRMS will  use its staffing model to determine the staffing needs by receipt workload  and adequately staff its DRMOs.  DOD also stated that DRMS is using  contract hires to supplement DRMO staff, as needed.  We view these  actions as responsive to our recommendation.  However, as a part of its  actions on our recommendation, DRMS also should provide adequate  supervision and monitoring to assure that excess property receipts are  verified when received and entered into DRMO inventory.  We have  modified our recommendation to emphasize this point.  These actions will  help to provide accountability for excess property and avoid the need for  subsequent adjustments, including an excessive number of write-offs for  inventory shortages.
DOD noted the merits of existing processes related to our recommendation  to develop a mechanism for linking prime vendor purchase transactions to  NSNs or other unique product identification.  DOD stated that DOD  directives require turn-in generators to provide a description of item(s) on  a turn-in document for which local stock numbers are listed.  DOD also  noted that bringing unused items back into DLA supply stock would negate  warehousing and distribution savings achieved through using prime vendor  direct shipments to DOD customers.  In addition, DOD stated that assigning  NSNs to nonstocked commercial items would significantly increase item  costs and run counter to the Federal Acquisition Streamlining Act of 1994  preference for commercial purchases.  As discussed in our report, DOD  already has efforts underway to promote the use of unique product  identifiers other than NSNs by commercial vendors and small business  firms.  DOD’s efforts include cost benefit considerations.  Consistent with  DOD’s efforts, it is important that DLA prime vendor purchase transactions  are identified to NSNs or other unique product identification to facilitate  economies through (1) volume purchasing and (2) reutilization of excess  items.
With regard to our recommendation that DRMS develop written guidance  and formal training on the proper assignment of condition codes to excess  property turn-ins, DOD stated that the military services currently receive  formal blocks of training and are in the better position to assign the  condition codes.  DOD also referred to current DOD and DRMS guidance  on condition codes.  In addition, DOD stated that DRMS will review current  guidance to ensure the appropriate assignment of responsibilities regarding  the establishment and use of condition codes.  As discussed in our report,  our statistical tests, DRMO screening visits, case study acquisitions of  excess DOD commodity items, and interviews of DRMO, military service,  and GSA officials all indicate that significant problems exist with the  reliability of excess property condition codes.  We determined that  unreliable condition codes were caused by a lack of detailed guidance and  a failure to follow existing guidance.  For example, as noted in our report,  military services often coded items as unserviceable when they no longer  had a need for them, even though the items were in new, unused, and  excellent condition.  Therefore, written guidance and training on the  proper assignment of condition codes also is important to correcting this  problem to assure that existing misconceptions are corrected and would be  responsive to our recommendation.
With regard to our recommendation that DRMS periodically inspect  liquidation contractor facilities and take immediate action to correct  structural impairments and other deficiencies, such as storage capacity,  DOD stated that an inspection of all liquidation contractor facilities has  been completed and periodic inspections will continue.  DOD also stated  that the only facility requiring immediate structural repair is the Norfolk,  Virginia, facility and that DRMS has issued a work order for the necessary  repairs.  DOD also stated that additional storage options are being regularly  evaluated by the contractor and DRMS.  As stated in our report, the  overflow of excess property at the Huntsville liquidation sales location was  a long-term, uncorrected problem, which resulted in a significant  breakdown in accountability and physical inventory control over excess  property.  It is important that timely and appropriate solutions be identified  and implemented to prevent this problem in the future.  The actions that  DOD highlighted in its letter are responsive to our recommendation.
Finally, DOD stated that actions have already been taken to respond to our  recommendation that DRMS consider available options and implement an  interim process for identifying turn-ins of excess new, unused, and  excellent condition items that could be reutilized to avoid unnecessary  purchases in the existing systems environment.  DOD enumerated  initiatives implemented during 2004 and early 2005 that improve the  visibility of excess property listed on DRMS’s Web page.  In addition, DOD  stated that DRMS will work with DLA item managers on the best  methodology to provide visibility of A-condition excess property.   Notwithstanding the improvements in DRMS’s Web page, the overall  commodity purchasing process has not changed, and DLA continues to  make commodity purchases without considering the availability of  identical A-condition excess commodities.  Achieving the economy and  efficiency contemplated by federal regulations and DOD policy is  dependent upon identifying continuing commodity purchases and having  the ability to match these items to A-condition excess property and hold it  for reutilization.  DOD should not dispose of excess A-condition excess  items that it continues to purchase.
DOD’s comment letter is reprinted in appendix II.
As agreed with your offices, unless you announce its contents earlier, we  will not distribute this report until 30 days from its date.  At that time, we  will send copies to interested congressional committees; the Secretary of  Defense; the Deputy Under Secretary of Defense for Logistics and Materiel  Readiness; the Secretary of the Army; the Secretary of the Navy; the  Secretary of the Air Force; the Director of the Defense Logistics Agency;  the Commander of the Defense Reutilization and Marketing Service; and  the Director of the Office of Management and Budget.  We will make copies  available to others upon request.  In addition, this report will be available at  no charge on the GAO Web site at http://www.gao.gov.
Please contact Gregory D. Kutz at (202) 512-9505 or kutzg@gao.gov, John  Ryan at (202) 512-9587 or ryanj@gao.gov, or Gayle L. Fischer at (202) 512- 9577 or fischerg@gao.gov if you or your staff have any questions  concerning this report.  Additional contacts and major contributors to this  report are provided in appendix VI.
section_title: Objectives, Scope, and Methodology
paragraphs: The purpose of our audit was to assess the economy and efficiency of the  Department of Defense (DOD) excess property program.  In doing so, we  assessed the effectiveness of systems, processes, and controls for assuring  a strong reutilization program.  Where we found controls to be ineffective,  we tested them further to determine (1) the magnitude and (2) root causes  of associated waste and inefficiency.  Our audit and investigation focused  on Defense Logistics Agency (DLA) purchases of consumable items and  Defense Reutilization and Marketing Service (DRMS) excess property  inventory activity during fiscal years 2002 and 2003, the most current fiscal  years for which data were available at the time we initiated our audit.  To  illustrate continuing problems, we obtained excess DOD commodity items  in new, unused, and excellent condition (A condition) during fiscal year  2004 and the first quarter of fiscal year 2005 that were in use by the military  services, were being purchased by DLA, or both at the time they were  available for reutilization.
We obtained access to the following systems and databases to support our  audit and investigation.
The DRMS Automated Information System (DAISY), which is an  automated inventory accounting management data system designed to  process excess DOD property from receipt to final disposal.
The DRMS Management Information Distribution and Access System  (MIDAS), which contains historical (archive) DAISY information.
DLA’s DOD Activity Address Directory (DODAAD), which contains  information to identify agency names and addresses for activity codes  that are associated with excess property requisitions.
The Government Liquidation, LLC database, which contains  transactions on public sales of excess DOD property items.
DLA’s Standard Automated Materiel Management System (SAMMS),  which contains transaction data on purchases by commodity group.
The Federal Logistics Information System (FEDLOG), which is a  logistics information system managed by the Defense Logistics  Information Service (DLIS) within DLA.  This system contains detailed  information on specifications, use, acquisition cost, and sources of  supply for national stock numbered items, including more than 7 million  stock numbers and more than 12 million part numbers.
We obtained online access to DAISY, MIDAS, DODAAD, and FEDLOG, and  we obtained copies of the SAMMS databases for fiscal years 2002 and 2003  and Government Liquidation, LLC databases for June 2001 through  December 2004.  For each of the DOD systems and databases used in our  work, we (1) obtained information from the system owner/manager on  their data reliability procedures; (2) reviewed systems documentation;  (3) reviewed related DOD Inspector General reports, DLA Comptroller  budget data, and independent public accounting firm reports related to  these data; and (4) performed electronic testing of commodity purchase  and excess inventory databases to identify obvious errors in accuracy and  completeness.  We verified database control totals, where appropriate.  We  also received FEDLOG training from the DLIS service provider.  When we  found obvious discrepancies, such as omitted national stock number  (NSN) data in the DLA commodity purchases databases and transaction  condition coding errors in the DRMS excess property systems data, we  brought them to the attention of agency management for corrective action.   We made appropriate adjustments to transaction data used in our analysis,  and we disclosed data limitations with respect to condition coding errors  and the omission of NSN data that affected our analysis.  Our data analysis  covered commodity purchases and excess commodity turn-ins and  disposal activity during fiscal years 2002 and 2003.  In addition, we  statistically tested the accuracy of excess inventory transactions at five  Defense Reutilization and Marketing Offices (DRMO) and five DLA supply  depots.  We also reviewed summary data and selected reports on DRMS  compliance reviews of 91 DRMOs during fiscal year 2004 to determine the  extent to which DRMS had identified problems with adherence to DOD and  DRMS policies, made recommendations for corrective actions, and  monitored DRMO actions to address its recommendations.  Based on these  procedures, we are confident that that the DOD data were sufficiently  reliable for the purposes of our analysis and findings.
subsections: section_title: Magnitude of Excess Property Reutilization Program Waste and Inefficiency
paragraphs: To determine the overall magnitude of waste and inefficiency related to the  DOD excess property reutilization program, we identified fiscal year 2002  and 2003 excess commodity disposal activity by property condition code  and examined the extent of DOD reutilization of excess items in new,  unused, and excellent condition (A-condition) versus transfers, donations,  public sales, and other disposals outside of DOD through scrap,  demilitarization, and hazardous materials contractors.  We also compared  DLA commodity purchase transactions to identical excess new, unused,  and excellent condition items to identify instances where DLA purchased  commodity items rather than reutilizing these excess items.  We used NSN  data as the basis for identifying identical items.  In addition, we analyzed  DLA supply depot excess commodity turn-ins to determine the extent to  which new, unused DLA supply depot inventory accounted for turn-ins of  excess of A-condition items. We used IDEA audit software to facilitate our  analysis.
subsections: section_title: Analysis of the Extent of DOD Reutilization
paragraphs: To determine the extent to which DOD reutilized excess commodities in A  condition during fiscal years 2002 and 2003, we used online access to the  DRMS MIDAS database of historical transactions and performed data  mining and analysis of the universe of excess commodity turn-in and  disposal transactions.  We identified key data elements, such as disposal  transaction types, the excess property recipient DOD Activity Address  Code (DODAAC), and condition codes.  We used these data elements to  identify the extent of DOD reutilization of excess A-condition commodities  compared to transfers; donations; public sales; and disposals of scrap,  hazardous materials, and demilitarized items.  We determined the type of  disposal transaction through analysis of the DODAAC that identifies the  name and address of the agency or program that received (or requisitioned)  the property.  Because DOD considers special program reutilization the  same as DOD reutilization, we used DODAACs to separately identify  reutilization transactions for special programs that were not directly  associated with DOD activities.  We also used DODAAC information to  determine the identity of turn-in generators and requisitioners of excess  DOD commodities for subsequent interviews of generators regarding why  new, unused items were excessed and excess property users about their  experience.
section_title: Analysis of Other Types of Excess Property Disposals
paragraphs: We also worked with DRMS officials to obtain information on transaction  codes for identifying disposals of hazardous materials, scrap, and  demilitarized items.  We independently performed data mining and  analysis, and we verified the results of our queries with DRMS officials in  order to provide reasonable assurance that our data-mining approach and  results were accurate.  We used the Government Liquidation, LLC database  to determine the acquisition value of commodity items sold and sale  revenues during fiscal years 2002 and 2003.
section_title: Analysis of Commodity Purchases Transactions
paragraphs: We used the six SAMMS commodity purchases databases we obtained to  identify key information on commodity items that military units purchased  from DLA, including the item description or name, NSN, purchase date,  unit price, unit acquisition cost, and full cost including the DLA user fee.   The six commodity groups we audited included (1) construction and land  and maritime weapons, (2) electrical, (3) general, (4) industrial,  (5) medical, and (6) textile.  We worked with DLA officials to identify items  to a commodity group based on the supply class number included in the  NSN or local stock number (LSN).
To determine the extent to which DLA made unnecessary purchases of new  items when identical items that were reported to be in A condition were  available for reutilization, we compared commodity purchase transactions  in SAMMS to excess property turn-in transactions in MIDAS.  We used  NSNs to identify instances where the military services ordered and  purchased items from DLA at the same time identical items that were  reported to be in new or excellent condition were available for  reutilization.  Although we identified at least $400 million in fiscal year 2002  and 2003 wasteful purchases related to A-condition excess items that were  available for reutilization, we were unable to determine the full magnitude  of this problem due to inconsistent recording of NSNs and improper  downgrading of condition codes.
section_title: Case Study Examples
paragraphs: We performed case study investigations of excess commodity turn-ins and  disposals during fiscal years 2002 through 2003.  In addition, to illustrate  that DRMS reutilization program waste and inefficiency are continuing  problems, during fiscal year 2004 and the first quarter of fiscal year 2005,  we obtained several excess DOD commodity items that were currently in  use, were being purchased at the time we acquired them, or both.  We used  data mining and analysis to identify commodity items for our case study  acquisitions.  To identify new and unused excess DOD commodity items  that were available for requisition at no cost, we accessed the DRMS  Reutilization, Transfer, and Donation Web page and identified excess DOD  commodity items available to federal agencies.  We confirmed that these  items were available to federal agencies by also accessing the General  Services Administration’s (GSA) GSAXcess Web page.  We used GAO’s  federal agency DODAAC to requisition new and unused excess DOD  commodity items in A condition.  We submitted our requisitions for  transfer of these excess DOD items through GSA.  To identify new and  unused items that we could purchase at minimal cost, we accessed  govliquidation.com.  We also accessed govliquidation.com to identify  continuing sales of our case study items.
We based our case study selections on commodities used by military units  and the quantity and dollar amount of purchases and excess property turn- ins associated with these items.  After we identified each new and unused  case study item that we wanted to purchase, we queried FEDLOG to  confirm the acquisition cost and current use of the item—that is, whether  an item was still being purchased or currently in use but being phased out  or was obsolete.  For further assurance on the status of the excess  commodities that we targeted for acquisition, we contacted the DLA item  managers responsible for these items to confirm that they were currently  being purchased, were in use by the military services, or both.  We also  contacted item managers to obtain information on how certain items, such  as circuit cards and power supply units, were used.
section_title: Causes of Reutilization Program Waste and Inefficiency
paragraphs: To determine the root causes of identified inefficiencies, we first gained an  understanding of the processes for acquisition and disposal of DOD  commodities.  We reviewed applicable laws and regulations and DOD,  military service, DLA, and DRMS policies and procedures.  We also  reviewed the DRMS contracts for DRMO property warehouse services and  liquidation sales for consistency with DOD policies.  In addition, we  reviewed SAMMS and MIDAS system manuals.  We met with and contacted  numerous DLA and DRMS officials and obtained documentation to assess  how the property reutilization program is monitored for effectiveness.  We  also met with or contacted DOD and Army, Navy, and Air Force officials  about their experience with commodity acquisitions, reutilization, and  disposals.  We interviewed DLA item managers and buyers to obtain  information on their roles and responsibilities and key systems and  controls involved in the commodity acquisition and management process.   We also obtained information on how decisions are made about whether to  purchase new items or to reutilize excess items through DOD’s reutilization  program.  We made visits to 12 DRMOs to observe excess property  processing, screen for excess case study items, investigate the disposition  of excess property turn-ins, or test the accuracy of excess property  inventory.  We also visited five DLA-managed Defense depots to test  inventory accuracy and observe excess property disposal processes.  In  addition, we visited 10 Government Liquidation, LLC sales locations.
We focused our assessment of the causes of reutilization program waste  and inefficiency on key aspects of the overall management control  environment, including (1) data reliability, (2) physical inventory control,  and (3) the current systems environment.  We used GAO’s Standards for  Internal Control in the Federal Government as criteria for identifying  internal control breakdowns that contributed to waste and inefficiency.
subsections: section_title: Data Reliability
paragraphs: We statistically tested the accuracy of current excess commodity  inventory transaction data at five DRMO warehouse locations and five DLA  supply depot locations.  Each location was a separate population of  randomly selected transactions.  We randomly selected transactions from  the population of current inventory transactions at each of the test  locations.  The five DRMO locations we tested were the Columbus DRMO  in Ohio; the Stockton DRMO in French Camp, California; the Hill DRMO at  Hill Air Force Base in Ogden, Utah; and the Norfolk DRMO and the  Richmond DRMO in Virginia.  Our selection of the five DRMOs was based  on geographic location, turn-in volume, types of excess items handled, and  military units generating the most turn-ins.  We tested inventory at Defense  depots that were co-located or located within proximity of the above  DRMOs, including Defense depots at Columbus, Ohio; San Joaquin,  California; Hill Air Force Base, Utah; Norfolk, Virginia; and Richmond,  Virginia.  Each location was a separate population, and we evaluated the  results of each sample location separately.
The purpose of our testing was to evaluate the effectiveness of controls  over existence—including timely recording of transactions, item  description (item name and NSN), and quantity—and condition coding.   Appendix V describes the specific criteria we used to conclude on the  effectiveness of DRMO and DLA supply depot controls for inventory  accuracy.
section_title: Physical Inventory Control
paragraphs: Our assessment of physical inventory control focused on the results of our  statistical tests discussed above and our review of DRMS summary data on  reported DRMO and DLA supply depot losses due to lost, stolen, and  damaged property.  We investigated problems associated with liquidation  contractor controls for safeguarding excess DOD property held for sale at  the Huntsville, Alabama, and the Norfolk, Virginia, sales locations.  We also  assessed the extent of damage to our case study purchase of bandages and  medical supply items from the Norfolk sales location.  In addition, we  obtained DRMS summary reports on losses of excess property at DRMOs  and DLA supply depots for fiscal years 2002 through 2004.  We referred  locations with the largest reported losses to our Office of Special  Investigations for further investigation.
section_title: Commodity Inventory Systems Environment
paragraphs: To gain an understanding of DLA commodity purchase and DRMS  commodity inventory systems and processes with regard to DOD’s excess  property reutilization program, we reviewed DLA and DRMS policies and  procedures, and interviewed DLA, DRMS, and DRMO program and systems  officials.  We also used observations and information obtained during our  statistical tests, excess property screening visits, and case study  investigations.  In addition, we relied on the body of work GAO has  performed in this area.
To determine the scope and status of DLA and DRMS systems efforts to  improve the reutilization process in the future, we interviewed DLA and  DRMS systems officials who are responsible for DLA’s Business Systems  Modernization (BSM) and Integrated Data Environment (IDE) and the  DRMS Reutilization Modernization Program (RMP).  We also reviewed  business systems modernization plans and related documents to determine  the current status, implementation time frames, and scope of planned  improvements.  In addition, we obtained and reviewed the Reutilization  Management Program Functional Requirements Document, the RMP  Decision Matrix, and implementation timelines.  We focused our  assessment on whether the systems modernization efforts, as currently  documented, would adequately address needed improvements in excess  property reutilization program economy and efficiency.
We conducted our work from November 2003 through February 2005 in  accordance with U.S. generally accepted government auditing standards.   We performed our investigative work in accordance with standards  prescribed by the President’s Council on Integrity and Efficiency.
section_title: Comments from the Department of Defense
section_title: Excess Property Condition Codes
paragraphs: DOD’s condition code is a two-digit alphanumeric code used to denote the  condition of excess property from the supply and the disposal perspective.   The DOD supply condition code is the alpha character in the first position  and shows the condition of property in the DLA depot inventory, or is  assigned by the unit turning in the excess property.  The GSA disposal  condition code, in the second position, shows whether the property is in  new, used, or repairable condition, salvageable, or should be scrapped.   (See table 7.)
section_title: Programs Authorized to Receive Excess DOD Property
paragraphs: Table 8 lists the DOD special programs that are authorized to receive  excess property.  In addition to DOD special programs, under the  Stevenson-Wydler Technology Innovation Act of 1980, as amended, DOD  makes computer equipment available to schools under the federal  government’s Computers for Learning Program following the DOD and  special program screening period and prior to the federal agency screening  period.  In accordance with 15 U.S.C. § 3710(i), the director of a laboratory  or the head of any federal agency or department may loan, lease, or give  research equipment that is excess to the needs of the laboratory, agency, or  department to an educational institution or nonprofit organization for the  conduct of technical and scientific education and research activities.
section_title: Results of Statistical Tests of Excess Commodity Inventory Accuracy
paragraphs: To evaluate the effectiveness of controls for assuring the accuracy of  excess commodity inventory data, we tested current inventory transactions  at five DRMO locations and five DLA supply depot locations.  Our tests  covered controls over physical existence, item description (item name and  NSN), quantity, and condition code.  DRMO inventory locations tested  were the Columbus DRMO in Columbus, Ohio; the Stockton DRMO in  French Camp, California; the Hill DRMO at Hill Air Force Base, in Ogden,  Utah; the Norfolk DRMO in Norfolk, Virginia; and the Richmond DRMO in  Richmond, Virginia.  For efficiency, we tested inventory at five DLA supply  depots that were co-located or located within proximity of the above  DRMOs, including the depots in Columbus, Ohio; San Joaquin County,  California; Hill Air Force Base, Utah; Norfolk, Virginia; and Richmond,  Virginia.  Each location was a separate population, and we evaluated the  results of each sample location separately.
We drew our statistical samples from the universe of excess property  transactions in current DRMS DAISY inventory, which includes excess  property warehoused at DRMOs and DLA supply depots.  We stratified our  samples by the two major categories of condition code—serviceable and  unserviceable—in order to determine whether errors were more prevalent  in one category.  From the population of current excess DOD inventory at  the time of our testing visit, we selected stratified random probability  samples of excess property turn-in transactions for each of the five DRMO  and each of the five DLA supply depot case study locations.  With these  statistically valid samples, each transaction in the population for the 10  case study locations had a nonzero probability of being included, and that  probability could be computed for any transaction.  Each sample  transaction for a test location was subsequently weighted in our analysis to  account statistically for all the transactions in the population for that  location, including those that were not selected.  Our test results relate to  the populations of transactions at the respective DRMO and DLA supply  depot locations, and the results cannot be projected to the population of  excess property transactions or the DRMOs or DLA supply depots as a  whole.
We present the results of our statistical samples for each population as  (1) our projection of the estimated error overall and for each control  attribute as point estimates and the two-sided 95 percent confidence  intervals for the failure rates and (2) our assessments of the effectiveness  of the controls and the relevant lower and upper bounds of a one-sided 95  percent confidence interval for the failure rate.  If the one-sided upper  bound is 5 percent or less, then the control is considered effective.  If the  one-sided lower bound is greater than 5 percent, then the control is  considered ineffective.  Otherwise, we say that there is not enough  evidence to assert either effectiveness or ineffectiveness.  All percentages  are rounded to the nearest percentage point.
subsections: section_title: Overall Results of Inventory Reliability Tests
paragraphs: Tables 9 and 10 present the overall results of our statistical tests of  inventory accuracy at the five DRMOs and the five DLA supply depots that  we tested.  The overall results show that controls for assuring the accuracy  of excess property inventory were ineffective at four of the five DRMOs  and three of the five DLA supply depots that we tested.  We tested physical  existence, including whether turn-ins recorded in inventory could be  physically located and whether inventory changes were recorded within 7  days.  We also tested the accuracy of item descriptions (item name(s) and  NSN(s)), recorded quantities, and condition code categories.
Because most of the errors we found related to the accuracy of condition  codes, we separately estimated the error rates for this control attribute.  A  turn-in transaction was considered a failure if the serviceable or  unserviceable condition code assigned to the item(s) was not accurate  based on our physical observation and judgment.  DLA and DRMO officials  who accompanied us during our testing provided their perspectives, which  we considered in our conclusions.  We based our conclusions on obvious  differences between the condition code assigned to the item and the  appearance of the item.  For example, some items were in the original  manufacturer packaging and other items were obviously used, dirty, or  worn.  If we were unsure of the condition of an item, we accepted the  condition code assigned by the military unit turn-in generator or the DLA  supply depot.  In addition, we did not question the assigned condition  codes of technical equipment items such as electronic parts and scientific  equipment.  Tables 11 through 13 show the results of our condition code  reliability tests for turn-in transactions at the five DRMOs that were coded  as being in serviceable and unserviceable condition.
As shown in table 13, we found significant problems with the accuracy of  unserviceable condition codes for excess commodities at four of the five  DRMOs we tested.
As shown in table 14, we found condition codes to be reliable at the five  DLA supply depots that we tested.
section_title: GAO Contacts and Staff Acknowledgments
subsections: section_title: GAO Contacts
section_title: Acknowledgments
paragraphs: Staff making key contributions to this report include Beatrice Alff, Mario  Artesiano, James D. Ashley, Cindy Barnes, Gary Bianchi, Erik Braun,  Matthew S. Brown, Randall J. Cole, Tracey L. Collins, Francine DelVecchio,  Lauren S. Fassler, Michele Fejfar, Gloria Hernandezsaunders, Wilfred B.  Holloway, Jason Kelly, Barbara C. Lewis, Kristen Plungas, and Ramon  Rodriguez.
Technical expertise was provided by Sushil K. Sharma, PhD, DrPH, and  Keith A. Rhodes, Chief Technologist.