As of September 30, 1997, the Navy reported that the value of its inventory was $16.8 billion. The Naval Supply Systems Command (NAVSUP) administers the Navy supply system and provides in-transit inventory management policies and procedures. The Command, through its NAVICP,initiates purchases and directs inventory movement for its customers. Until the inventory reaches its intended destination, NAVICP refers to it as in transit. The major categories of in-transit inventory are as follows: Warehoused material—material redistributed between storage activities, broken items shipped from Navy consolidation points to a commercial or other military service repair facility, and material returned from a commercial or other military service repair facility or an end user. Purchased material—new material shipped from a commercial source to a storage activity. End-user material—material ordered from a storage activity or commercial source by a unit that expects to use it. The Navy is required to use a variety of inventory tracking procedures to monitor shipment and receipt of in-transit items. Although the specific procedures for each major category have some differences, they all have three common control elements. First, the recipient of the material is responsible for notifying the NAVICP once the item has been received. This notification is an internal control designed to account for all in-transit assets. Second, if within 45 days of shipment NAVICP has not been notified that a shipment has arrived, it is required to follow up with the intended recipient. The rationale behind this requirement is that until receipt is confirmed, the exact status of the shipment is uncertain and therefore vulnerable to fraud, waste, and abuse. Third, the Navy is required to oversee in-transit inventory to assess the effectiveness of policies and procedures governing that inventory. Appendix II contains additional details on the receipt acknowledgment and follow-up procedures for in-transit items. Implementing inventory controls is a shared responsibility of the NAVICP and shipping and receiving activities, which include Defense Logistics Agency (DLA) and Navy-managed activities, and repair facilities. The Navy reported that it was unable to account for substantial amounts of in-transit inventory. This inventory is vulnerable to theft or loss and could cause managers to implement inefficient, ineffective decisions and practices regarding purchases. Between October 1995 and September 1998, the Navy reported that it wrote off as lost in-transit inventory valued at over $3 billion. Our analysis of financial reports showed that NAVICP Philadelphia was responsible for about $2.5 billion, or 84 percent, of these losses. Figure 1 summarizes the value of in-transit inventory losses by inventory control point. The Navy’s in-transit inventory losses may be greater than the Navy recognizes because of uncertainties about the status of shipments to end users that did not have a corresponding notification of receipt. Figure 1 does not include any unaccounted for shipments to end users. For example, as we reported in February 1998, DOD did not have receipts for about 60 percent of its 21 million shipments to end users in fiscal year 1997. Among the DOD components, the Navy was responsible for over one-third of DOD’s 21 million shipments and almost one-half of DOD’s 12.4 million unacknowledged receipts (valued at $11.7 billion). Our review of 30,314 lost warehoused shipments (representing 132,793 items worth $753 million) at NAVICP Philadelphia in fiscal year 1997 showed that over 8,000 shipments contained military technology that needed to be protected. Classified and sensitive items included aircraft-guided missile launchers, military night vision devices, and communications equipment. Moreover, some shipments reported as lost included pilferable items such as radio sets and radar transmitters that have a ready resale value or civilian application and are therefore especially subject to theft. Although not categorized by DOD as pilferable, the lost items also included such items as video recorders and generators. Figure 2 summarizes the items lost in transit by security classification and figure 3 shows the items’ value. Naval Supply Systems Command and NAVICP Philadelphia officials pointed out that in-transit losses for high-dollar items have declined from $1.2 billion to $600 million over the past 3 fiscal years but acknowledged that in-transit inventory continues to be a primary concern. According to these officials, in some instances the reported in-transit inventory losses might have resulted from accounting adjustments and, as such, were not real losses. They further stated that in most cases, the reported losses occurred because activities involved in the movement, repair, and storage of in-transit items did not (1) notify NAVICP Philadelphia that they shipped or received items as required by Navy regulations or (2) respond to follow-up inquiries made by NAVICP Philadelphia. However, as we note in the following section, our review of lost in-transit sample items revealed that the failure to comply with procedures for controlling in-transit inventory did not stop with the issuing, shipping, and receiving activities and did not result from accounting adjustments as Navy officials asserted. As a result of several significant control weaknesses, the Navy’s in-transit inventory is highly vulnerable to fraud, waste, and abuse. First, end users have not routinely reported receipt of items to the NAVICP. Second, the integrated accounting and logistics systems that tie the Navy’s accounting systems to its in-transit inventory tracking systems have not been effective. Third, NAVICP Philadelphia and its issuing activities, intended recipients, and commercial carriers have not adequately investigated cases in which warehoused material was not acknowledged as received. Fourth, NAVICP Philadelphia has not monitored the receipt of purchased material from commercial sources. Fifth, NAVSUP and NAVICP Philadelphia have not provided adequate oversight and monitoring of in-transit inventory. End users have not routinely reported receipt of items to NAVICP Philadelphia. For a 1-year period ending in May 1998, NAVICP Philadelphia closed the records for over $743 million in shipments that did not have a notification of receipt and had been outstanding for over 90 days. The NAVICP transfers accountability of material when it issues a release order to a DOD storage activity to ship the material and then to customers when they receive the material. End users are required by DOD policy to record receipts of material and notify the appropriate inventory control point within 5 calendar days (either electronically or by mail). We judgmentally selected for review 92 reported end-user shipments (valued at $5.2 million) whose receipt, according to NAVICP Philadelphia records, had not been acknowledged. We sought to determine whether those shipments had in fact been received and reported to NAVICP Philadelphia. According to NAVICP Philadelphia officials, 51 of the 92 shipments (valued at over $566,000) were to storage activities and had been incorrectly shown as end-user shipments. Thus, the records of the shipments should not have been closed by the NAVICP Philadelphia automated tracking system for end-user receipts. We then reviewed the status of these 51 shipments in the warehoused material receipt tracking system. NAVICP Philadelphia and the intended recipient were unable to provide evidence that four shipments had been delivered or received. The remaining 47 shipments had been received. Of the remaining 41 shipments (valued at $4.7 million), we determined that 28 (valued at $3.3 million) had in fact been received and accounted for, but the receipt acknowledgments had not been sent to NAVICP Philadelphia. According to one Defense Automated Addressing System (DAAS) Office official, the end users’ receipt acknowledgment codes were obsolete. Consequently, DAAS did not forward the acknowledgments to NAVICP Philadelphia. When we informed end-user officials that their acknowledgment codes were obsolete, they said that the Navy had not yet changed its reporting systems and procedures to conform with DOD’s changes in the codes. Our review also showed other shortcomings in the execution of in-transit control policies and procedures for the remaining 13 shipments. For example: One shipment valued at $606,330 was assumed by NAVICP Philadelphia to have been received by the end user but was never shipped by the depot. Twelve shipments valued at $737,986 had been received by the end user but were not reported to NAVICP Philadelphia. End-user officials said that their automated logistics system is not designed to acknowledge material receipt. However, DOD policy states that if the reporting activity cannot transmit receipt electronically, it should prepare a manual material receipt acknowledgment and mail the form directly to the inventory control point. Because of poorly integrated accounting and logistics systems, the Navy may have written off as lost millions of dollars of warehoused material shipments that had actually been received and accounted for by NAVICP Philadelphia and in DAAS historical records. Navy policy for following up on in-transit material states that the NAVICP should search its internal files for delinquent receipts of warehoused material shipments. Delinquent shipments, according to Navy policy, should be written off as inventory losses if their receipts remain unconfirmed after 6 months or 11 months, depending on their value. According to Navy policy, shipments of consumable items, depot-level reparable items, and appropriated purchases valued at less than $2,500, $15,000, and $20,000, respectively, should be written off as inventory losses if their receipts remain unconfirmed after 6 months. All other shipments require external follow-up and should be written off as lost if their receipts remain unconfirmed after 11 months. At NAVICP Philadelphia, 15 (16 percent) of the 94 warehoused shipments that we sampled were written off as lost despite the fact that their receipts were recorded in NAVICP Philadelphia’s internal files and DAAS historical records 6 months to 1 year in advance of the date they were written off.