[House Hearing, 109 Congress]
[From the U.S. Government Publishing Office]





          DOD EXCESS PROPERTY SYSTEMS: THROWING AWAY MILLIONS

=======================================================================

                                HEARING

                               before the

                   SUBCOMMITTEE ON NATIONAL SECURITY,
                  EMERGING THREATS, AND INTERNATIONAL
                               RELATIONS

                                 of the

                              COMMITTEE ON
                           GOVERNMENT REFORM

                        HOUSE OF REPRESENTATIVES

                       ONE HUNDRED NINTH CONGRESS

                             FIRST SESSION

                               __________

                              JUNE 7, 2005

                               __________

                           Serial No. 109-51

                               __________

       Printed for the use of the Committee on Government Reform


  Available via the World Wide Web: http://www.gpoaccess.gov/congress/
                               index.html
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                     COMMITTEE ON GOVERNMENT REFORM

                     TOM DAVIS, Virginia, Chairman
CHRISTOPHER SHAYS, Connecticut       HENRY A. WAXMAN, California
DAN BURTON, Indiana                  TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         MAJOR R. OWENS, New York
JOHN M. McHUGH, New York             EDOLPHUS TOWNS, New York
JOHN L. MICA, Florida                PAUL E. KANJORSKI, Pennsylvania
GIL GUTKNECHT, Minnesota             CAROLYN B. MALONEY, New York
MARK E. SOUDER, Indiana              ELIJAH E. CUMMINGS, Maryland
STEVEN C. LaTOURETTE, Ohio           DENNIS J. KUCINICH, Ohio
TODD RUSSELL PLATTS, Pennsylvania    DANNY K. DAVIS, Illinois
CHRIS CANNON, Utah                   WM. LACY CLAY, Missouri
JOHN J. DUNCAN, Jr., Tennessee       DIANE E. WATSON, California
CANDICE S. MILLER, Michigan          STEPHEN F. LYNCH, Massachusetts
MICHAEL R. TURNER, Ohio              CHRIS VAN HOLLEN, Maryland
DARRELL E. ISSA, California          LINDA T. SANCHEZ, California
GINNY BROWN-WAITE, Florida           C.A. DUTCH RUPPERSBERGER, Maryland
JON C. PORTER, Nevada                BRIAN HIGGINS, New York
KENNY MARCHANT, Texas                ELEANOR HOLMES NORTON, District of 
LYNN A. WESTMORELAND, Georgia            Columbia
PATRICK T. McHENRY, North Carolina               ------
CHARLES W. DENT, Pennsylvania        BERNARD SANDERS, Vermont 
VIRGINIA FOXX, North Carolina            (Independent)
------ ------

                    Melissa Wojciak, Staff Director
       David Marin, Deputy Staff Director/Communications Director
                      Rob Borden, Parliamentarian
                       Teresa Austin, Chief Clerk
          Phil Barnett, Minority Chief of Staff/Chief Counsel

Subcommittee on National Security, Emerging Threats, and International 
                               Relations

                CHRISTOPHER SHAYS, Connecticut, Chairman
KENNY MARCHANT, Texas                DENNIS J. KUCINICH, Ohio
DAN BURTON, Indiana                  TOM LANTOS, California
ILEANA ROS-LEHTINEN, Florida         BERNARD SANDERS, Vermont
JOHN M. McHUGH, New York             CAROLYN B. MALONEY, New York
STEVEN C. LaTOURETTE, Ohio           CHRIS VAN HOLLEN, Maryland
TODD RUSSELL PLATTS, Pennsylvania    LINDA T. SANCHEZ, California
JOHN J. DUNCAN, Jr., Tennessee       C.A. DUTCH RUPPERSBERGER, Maryland
MICHAEL R. TURNER, Ohio              STEPHEN F. LYNCH, Massachusetts
JON C. PORTER, Nevada                BRIAN HIGGINS, New York
CHARLES W. DENT, Pennsylvania

                               Ex Officio

TOM DAVIS, Virginia                  HENRY A. WAXMAN, California
            Lawrence J. Halloran, Staff Director and Counsel
                  J. Vincent Chase, Chief Investigator
                        Robert A. Briggs, Clerk
             Andrew Su, Minority Professional Staff Member


                            C O N T E N T S

                              ----------                              
                                                                   Page
Hearing held on June 7, 2005.....................................     1
Statement of:
    Estevez, Alan F., Assistant Deputy Under Secretary of Defense 
      (Supply Chain Integration), Department of Defense; Major 
      General Daniel Mongeon, Director for Logistics Operations, 
      Defense Logistics Agency; and Colonel Patrick E. O'Donnell, 
      Commander, Defense Reutilization and Marketing Service, 
      Department of Defense......................................    65
        Estevez, Alan F..........................................    65
        Mongeon, Major General Daniel............................    82
        O'Donnell, Colonel Patrick E.............................    93
    Kutz, Gregory D., Managing Director, Forensic Audits and 
      Special Investigations, U.S. Government Accountability 
      Office, accompanied by Gayle L. Fischer, Assistant 
      Director, Forensic Audits and Special Investigations; John 
      J. Ryan, Assistant Director/Special Agent, Forensic Audits 
      and Special Investigations; and Keith Rhodes, Chief 
      Technologist, Applied Research and Methods.................    11
Letters, statements, etc., submitted for the record by:
    Estevez, Alan F., Assistant Deputy Under Secretary of Defense 
      (Supply Chain Integration), Department of Defense, prepared 
      statement of...............................................    68
    Kutz, Gregory D., Managing Director, Forensic Audits and 
      Special Investigations, U.S. Government Accountability 
      Office, prepared statement of..............................    14
    Mongeon, Major General Daniel, Director for Logistics 
      Operations, Defense Logistics Agency, prepared statement of    84
    O'Donnell, Colonel Patrick E., Commander, Defense 
      Reutilization and Marketing Service, Department of Defense, 
      prepared statement of......................................    95
    Shays, Hon. Christopher, a Representative in Congress from 
      the State of Connecticut, prepared statement of............     3
    Waxman, Hon. Henry A., a Representative in Congress from the 
      State of California, prepared statement of.................     6

 
          DOD EXCESS PROPERTY SYSTEMS: THROWING AWAY MILLIONS

                              ----------                              


                         TUESDAY, JUNE 7, 2005

                  House of Representatives,
       Subcommittee on National Security, Emerging 
              Threats, and International Relations,
                            Committee on Government Reform,
                                                    Washington, DC.
    The subcommittee met, pursuant to notice, at 2:15 p.m., in 
room 2154, Rayburn House Office Building, Hon. Christopher 
Shays (chairman of the subcommittee) presiding.
    Present: Representatives Shays, Duncan, Dent, and Waxman.
    Staff present: Lawrence Halloran, staff director and 
counsel; J. Vincent Chase, chief investigator; Robert A. 
Briggs, clerk; Sam Raymond, intern; Andrew Su, minority 
professional staff member; Earley Green, minority chief clerk; 
and Jean Gosa, minority assistant clerk.
    Mr. Shays. A quorum being present, the Subcommittee on 
National Security, Emerging Threats, and International 
Relations hearing entitled, ``DOD Excess Property Systems: 
Throwing Away Millions'' is called to order.
    Following the frugal maxim, ``One man's trash is another 
man's treasure,'' the Department of Defense [DOD], sells or 
donates equipment and commodities determined to be in excess of 
military needs. But now we find the Pentagon is throwing out a 
great deal of treasure with the trash, disposing of items at 
steep discounts through one program while other offices within 
DOD buy the same things new and at full price.
    Problems in the DOD excess property system are chronic, 
they're dangerous, and extensive. Three years ago this 
subcommittee discovered DOD continued to sell top-grade 
chemical protective suits on the Internet while military units 
were waiting to acquire exactly the same gear at 10 times the 
on-line cost. In 2003, we revealed the indiscriminate sale of 
biological lab equipment by DOD without an assessment of the 
risks it might be used against us by terrorists. Today, the 
true scope and costs of systemic weaknesses in the surplus 
supply chain come into clearer view.
    At the subcommittee's request, the Government 
Accountability Office [GAO], extensively audited and tested DOD 
excess property systems. Their report released this afternoon 
finds substantial waste and inefficiencies intractably embedded 
in sloppy, uncoordinated management and inventory control 
processes. The numbers we will hear are staggering. Each year 
DOD disposes of property that costs billions to acquire, yet 
GAO found at least $400 million spent over 2 fiscal years on 
the purchase of items that need not have been bought at all 
because they were already paid for and available in that 
surplus pool. Many of the items here today fit that 
description, good-as-new or serviceable equipment that DOD sold 
to GAO for a fraction of the price it was paying to buy the 
same material.
    This isn't just a matter of bad bookkeeping, lax management 
or weak inventory controls, these numbers measure major 
systemic weaknesses in critical combat support machinery. Waste 
on this scale affects our ability to meet the immediate needs 
of men and women in uniform. The $400 million spent on unneeded 
equipment could have bought body armor, medical supplies, or 
more than 1,700 fully armored Humvees to protect Coalition 
forces against deadly improvised explosive devices.
    Simply put, DOD buys too much and then cannot, with any 
accuracy, track where the excess property is or who might need 
it. Once dropped into the multi-billion dollar slurry of the 
excess property system, good equipment can mix with bad, get 
left out in the rain, or disappear altogether. Such an 
unaccountable system easily hides malfeasance and invites 
theft.
    Some broken links in this clumsy and costly chain of 
custody are well known. For more than a decade, GAO has found 
that DOD asset visibility and inventory management weaknesses 
pose a huge risk of waste, abuse and fraud. Now we find DOD's 
bargain basement is leaking badly, hemorrhaging on a scale that 
no business could or would tolerate.
    The time is long past for standard approaches and marginal 
fixes to a fundamentally broken system. As supplier to the 
warfighter and stewards of immense fiscal resources, DOD must 
have end-to-end visibility and control over the purchase, 
transportation, storage, use and final disposition of military 
inventory. Those who buy too much this year have to know they 
will pay a price when the equipment appears for sale on the 
Internet next year for one-tenth the acquisition cost.
    We are grateful to the GAO team for an in-depth report on a 
very serious problem, and we look to our DOD witnesses for a 
discussion of equally serious solutions.
    At this time, the Chair would recognize the ranking member 
of the full committee, Mr. Henry Waxman.
    [The prepared statement of Hon. Christopher Shays follows:]

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    Mr. Waxman. Thank you very much, Mr. Chairman. I'm glad the 
subcommittee is holding this hearing today on procurement 
problems at Defense, and I commend you for your leadership on 
this issue.
    I'm going to be blunt in my remarks. This administration is 
squandering literally billions of dollars on wasteful Federal 
contracts. Private contractors are reaping a bonanza while 
taxpayers are being gouged. Whether the explanation is gross 
incompetence or deliberate malfeasance, the result is the same: 
Taxpayers are being vastly overcharged.
    The litany of this administration's mismanagement of 
Federal contracts is long and costly. The value of no-bid 
contracts has skyrocketed under the Bush administration. 
Oversight of Federal contracts has been turned over to private 
companies with blatant conflicts of interest, and when 
government auditors do find abuse their recommendations are 
ignored.
    Nearly every week the papers are full of stories of 
contract abuse. The Department of Homeland Security has wasted 
hundreds of millions of dollars on security contracts that have 
produced virtually no result. The FBI has spent $170 million on 
virtual case file software that doesn't work. And in Iraq, 
Halliburton has overcharged by hundreds of millions of dollars, 
yet the administration continues to shower the company with 
Federal funds, bonuses and special treatment.
    Unfortunately, these are not isolated incidences, they are 
a pattern of wanton abuse and mismanagement.
    In today's hearing we will hear about a particularly 
egregious example of abuse. GAO tells us that the Pentagon has 
squandered $3\1/2\ billion in valuable new equipment by selling 
it off at fire-sale prices. But in Iraq, our soldiers are dying 
because we cannot find the resources to buy the proper armor 
for our troops and their vehicles.
    But here in the United States, the Pentagon has sold off 
billions of dollars worth of medical equipment, power supply 
units, helicopters, vehicle parts, combat boots, and even 
military medals at salvage prices.
    And these examples are the rule, not the exception. 
According to GAO, the Defense Department gets fair value for 
surplus Federal property just 12 percent of the time. The rest 
of the time the Defense Department has destroyed perfectly good 
equipment or sold it for pennies on the dollar.
    Congress has a responsibility to do oversight to prevent 
these abuses. That's why I commend Chairman Shays for holding 
this hearing. But we also need legislation, and for this reason 
I will soon be introducing the Clean Contracting Act to stop 
these indefensible procurement and disposal practices.
    I want to thank the chairman for requesting the GAO report 
that is the subject of today's hearing, as well as the ranking 
member of the subcommittees, and I especially want to thank 
Greg Kutz and the other members of the GAO, the investigative 
team, for their excellent work on this important report.
    Thank you, Mr. Chairman.
    [The prepared statement of Hon. Henry A. Waxman follows:]

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    Mr. Shays. Thank you, Mr. Ranking Member. The Chair would 
now recognize Mr. Duncan.
    Mr. Duncan. Well, thank you very much, Mr. Chairman. Once 
again you're out in front of and on top of a very important 
subject. I commend you for calling this hearing.
    I don't know the full details, but I do understand that the 
report shows that during fiscal years 2002, 2003 the GAO found 
that the Department of Defense disposed of $2.2 billion worth 
of materials that were reported to be in A condition, that were 
either brand new and unused or barely used, and that those 
things were in new or excellent condition. And I know that we 
talk about billions up here like it's so much that it becomes 
meaningless, but that is a lot of money. It is an unbelievable, 
staggering amount of money.
    I understand further that on July 30, 2003 the report says 
the Department of Defense sold 172 pairs of new cold weather 
boots, valued $23,220, for $69, less than a cost of one pair of 
shoes; that during those years surveyed the Department of 
Defense destroyed $73.7 million in circuit cards, $10.2 million 
in radio sets, $9.1 million in aircraft parts, $3.4 million 
worth of power supply units, on and on and on; that the 
Department purchased at least $400 million of identical items 
during this time instead of using available excess A condition 
items.
    The Pentagon, the Department of Defense, seems to have the 
idea that this Congress will give them anything it wants no 
matter how terrible the job is that they do, how wasteful the 
job is that they do, and maybe that's the case but it shouldn't 
be. The report says the Defense Reutilization and Marketing 
Services offices that has the responsibility for handling the 
express property have experienced losses of $466 million from 
2002 to 2004, and that one DRMO holding excess property had an 
error rate of 47 percent.
    Let me tell you this: Anybody who is not horrified by this 
does not deserve to call themselves a conservative; anybody 
that is not horrified by this does not deserve to be called a 
friend of the taxpayer; anybody who is even remotely connected 
to this should be ashamed. Any large business with this kind of 
record, their stock would drop dramatically, heads would roll, 
people would be gotten rid of.
    I know that the cause of this civil service system that 
gives way too much protection to people who screw up horribly, 
that nothing will be done or very little will be done, but 
hopefully somebody will act on this and do something about this 
because this type of record should not--this type of activity 
should not continue to go on.
    Thank you very much, Mr. Chairman.
    Mr. Shays. I thank the gentleman very much. And just to 
announce that it's our intention, as we said before, to hold a 
hearing on June 21st on the U.S. Stewardship of the Development 
Fund for Iraq [DFI], the successor fund to the U.N. Oil for 
Food Program, which is basically Iraqi money under our 
stewardship. And we know we need to be looking at that and will 
be.
    At this time, the Chair would just welcome our first panel. 
We have one speaker, Mr. Gregory Kutz, Managing Director of 
Forensic Audits and Special Investigations, U.S. Government 
Accountability Office, accompanied by Ms. Gayle Fischer, 
Assistant Director; Mr. John J. Ryan, Assistant Director/
Special Agent; and Mr. Keith Rhodes, Chief Technologist. We 
welcome all of you.
    Is there anyone else that might be responding to questions, 
Mr. Kutz?
    Mr. Kutz. One other.
    Mr. Shays. So we will ask that individual to stand as well 
as I administer the oath.
    [Witnesses sworn.]
    Mr. Shays. Note for the record our primary witness and 
those accompanying him have responded in the affirmative. And 
let me just take care of one--I ask unanimous consent that all 
members of the subcommittee be permitted to place an opening 
statement in the record, and that the record remain open for 3 
days for that purpose. Without objection, so ordered. I ask 
further that all witnesses be permitted to include their 
written statement in the record. Without objection, so ordered.
    And if I can, before you start, congratulations on a 
document that helps us do our job better and will help the DOD 
do its job better. We thank you for being here.
    Mr. Kutz, we're going to have a 5-minute period, and then 
we'll roll it over for another 5 minutes, but within 10 minutes 
I'm sure you can cover what you need to. And then we will start 
with questions.

   STATEMENT OF GREGORY D. KUTZ, MANAGING DIRECTOR, FORENSIC 
      AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT 
    ACCOUNTABILITY OFFICE, ACCOMPANIED BY GAYLE L. FISCHER, 
ASSISTANT DIRECTOR, FORENSIC AUDITS AND SPECIAL INVESTIGATIONS; 
JOHN J. RYAN, ASSISTANT DIRECTOR/SPECIAL AGENT, FORENSIC AUDITS 
      AND SPECIAL INVESTIGATIONS; AND KEITH RHODES, CHIEF 
           TECHNOLOGIST, APPLIED RESEARCH AND METHODS

    Mr. Kutz. Mr. Chairman, Ranking Member Waxman and 
Congressman Duncan, thank you for the opportunity to discuss 
the sale of DOD excess property.
    Previously we testified that DOD was selling excess 
property that could be used to produce and disseminate anthrax. 
We also testified that DOD was selling new chem-biosuits on the 
Internet for $3, while at the same time buying them for $200.
    Based on these findings, you asked us to conduct a broader 
study of the economy and efficiency of this system. Our bottom 
line today is that ineffective management oversight and 
controls have resulted in hundreds of millions of dollars of 
waste and inefficiency in the DOD excess property system.
    My testimony has two parts: First, the magnitude of waste 
and inefficiency, and, second, the root causes of these 
problems.
    First, DOD reported that $29 billion of the $33 billion in 
excess commodity disposals for 2002 through 2004 were unusable 
items, or junk. By junk, I mean items that are in need of 
significant repair, obsolete, or that need to be destroyed. 
However, the remaining $4 billion related to items that were in 
new, unused and excellent condition, referred to by DOD as A 
condition. Of the $4 billion, we determined that $3\1/2\ 
billion was waste because A condition items were given away, 
sold on the Internet for pennies on the dollar, or destroyed.
    Part of the $3\1/2\ billion of waste is caused by a chronic 
DOD problem, buying more inventory than it needs. When this 
happens inventory items are warehoused until they are obsolete 
and ultimately declared excess. By the time these items get to 
the excess property system they are no longer in demand, and 
thus are basically worthless.
    However, we also identified, as you mentioned, at least 
$400 million of new, unused inventory that was sold or given 
away at the same time DOD was buying the same items. By 
definition, new unused inventory that DOD is still buying is 
not excess to its needs. This is where the excess property 
system failed, which resulted in one part of DOD selling, 
giving away or destroying the very same items that were needed 
to support our military forces.
    To illustrate this waste, GAO ordered several new items at 
little or new cost. Also, using our undercover credit card, we 
purchased other DOD items on the Internet from 
govliquidation.com. We have these items here today as the 
exhibits you see labeled and also on the table, and we will 
show some of those on the monitors as I walk through this.
    The items that GAO ordered included a new medical 
instrument chest, which is on my left, two circuit cards, which 
are on my right, and two power supply units, also on my right. 
The power supply units are currently used in the electronic 
warfare system of the Seawolf fast attack nuclear submarine. 
The circuit cards are used in secure satellite communications 
gear by the Navy.
    We also purchased on the Internet new extreme cold weather 
boots, tents, gasoline burner units, portable suction 
apparatus, bandages and medical supplies, badges and insignias, 
Cooper tires, and Class A military uniforms.
    Let me spend a few minutes discussing the boots and the 
tents so I can bring these case studies to life for you. The 
boots were advertised on govliquidation.com as being 30 pair 
that were condemned. However, when we received our order, we 
found that our purchase included 42 pairs of boots of which 37 
were in new, unused condition like the ones you see on my 
right. We paid about $12 per pair for these boots, while DOD 
paid $135 per pair. Shortly after our purchase we found that 
DOD had placed an order to purchase over 30,000 pair of the 
very same boots. In another case we found 172 pairs of boots 
were sold to the Robinson Trading Co. for 40 cents a pair.
    We also purchased 27 tents on the Internet for $548 that 
DOD paid over $2,100 for. Although the tents were also 
advertised as being condemned, when we received our order we 
found that our purchase included 21 new, unused tents like the 
one at my left. At the same time we made our purchase, an order 
had been placed for 35,000 of these same tents at a cost of 
$2\1/2\ million. In total, we paid about $3,000 for the items 
that we obtained, DOD paid over $80,000 for these same items. 
All of the items displayed here today were still being 
purchased and were in demand by the military services.
    Second, the causes of waste and inefficiency included 
unreliable data, inadequate management oversight and physical 
control, and outdated systems.
    We found significant data reliability problems, including 
errors in quantity, description and condition of excess 
property items. Military units have lost confidence in the 
reliability of excess property data and thus purchase new items 
instead of using items that are in the excess property system.
    With respect to automated systems, we found the lack of 
integration of purchasing systems and the excess property 
systems was a major issue. In effect, these systems do not 
share data that prevents the purchase of new items that DOD 
already has available in the excess property system.
    Our related report included 13 recommendations to DOD 
related to people, processes and automated systems. DOD is 
taking actions to address all of our recommendations.
    In conclusion, with the serious fiscal challenges facing 
our Nation and with our forces fighting the global war on 
terrorism, the government can't afford to be giving away 
inventory that it's buying at the same time. No doubt many of 
the businesses that profit from this hidden subsidy would like 
to see DOD continue selling new, unused items for pennies on 
the dollar. We believe improvements in management of the excess 
property system could save taxpayers hundreds of millions of 
dollars annually.
    Mr. Chairman, this ends my statement. Mr. Rhodes, Special 
Agent Ryan, Ms. Fischer and I would be happy to answer your 
questions.
    [Note.--The GAO report entitled, ``DOD Excess Property, 
Management Control Breakdowns Result in Substantial Waste and 
Inefficiency,'' may be found in subcommittee files.]
    [The prepared statement of Mr. Kutz follows:]

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    Mr. Shays. Thank you, Mr. Kutz.
    First off, how long was this investigation?
    Mr. Kutz. A little over a year.
    Mr. Shays. And tell me, were you surprised by anything you 
found, or was your opinion such that you just weren't 
surprised?
    Mr. Kutz. Well, we had suspicions. In my opening statement 
I had mentioned the chem-biosuits from your hearing several 
years ago where they were selling them for $3 at the same time 
they were buying brand new JS List suits, which are the ones 
that the soldiers are using in Iraq, for example. So we had 
suspicions that this could be a broader problem, and after 
discussing this issue with your staff we decided it would be a 
good idea to take a broader look at the entire system to see 
how significant the waste and efficiency could be.
    Mr. Shays. Well, I'll use the answer to my question by 
saying I wasn't surprised because of that, and is that your 
response?
    Mr. Kutz. That would be my response, yes.
    Mr. Shays. All of the equipment that we see here, it's your 
testimony it is still being used by DOD?
    Mr. Kutz. I don't know if it still is. At the time that we 
ordered it or requisitioned it, it was still in demand by the 
services, that is correct.
    Mr. Shays. Of these, which ones do you find the hardest to 
comprehend--well, I use the word--which ones here do you find 
are the most alarming; in other words, alarming you can use in 
terms of threatening national security, or just alarming 
because of the magnitude of the issue? I have my own personal 
choice, I'm just curious what yours is.
    Mr. Kutz. I think we probably have the same one. The power 
supply units for nuclear attack submarines, we're not sure why 
DOD would be letting GAO have them. We don't have any nuclear 
submarines at GAO, so there would be no reason for us to get 
those. The same thing with the circuit cards that are for 
cryptologic satellite communications. We have no need for that, 
yet we were able to get that.
    Now, whether there is any security issues----
    Mr. Shays. When you say ``we,'' in other words, why would 
anyone buy it?
    Mr. Kutz. Well, we didn't buy those. We requisitioned those 
as GAO. The medical chests, the power supply unit and the 
circuit cards, we requisitioned those. They knew we were GAO 
for those. The rest of them we used our undercover card to buy 
on the Internet from the contractor, govliquidation.
    Mr. Shays. Now why did you do the requisition? Did you try 
first to see if you could buy them?
    Mr. Kutz. No. We wanted to check both parts of the system. 
The way the system works is, first of all, DOD units and some 
other entities get a first shot at these items, and then they 
go to GSA, and governmentwide other agencies get a chance, 
State and local governments, local law enforcement, and once 
they go through that they go to governmentliquidation.com and 
can be sold on the Internet. And so we wanted to check out 
various stages of the process to see what we could requisition 
versus what we could buy at the end.
    Mr. Shays. I'll add another one, the uniforms and the 
insignias that you could buy; is that the extent of the 
insignias that you could buy or do you think you could buy 
others as well?
    Mr. Kutz. We bought others; I mean, we didn't have enough 
room to put them on the board. We had 8,000 of them.
    Mr. Shays. You can get 8,000?
    Mr. Kutz. Yes.
    Mr. Shays. Not just duplicates, but other insignias as 
well?
    Mr. Kutz. We have some others, yes.
    Mr. Shays. So it is possible for someone to just basically 
look like a soldier or sailor, Marine.
    Mr. Kutz. Yes.
    Mr. Shays. Just as an aside, I would imagine some of these 
uniforms are sold to our troops. Do they have to pay full price 
when they buy them?
    Ms. Fischer. Chairman Shays, the military has a uniform 
allowance, so within that allowance they're issued a number of 
uniforms, shirts, trousers, jackets, camouflaged clothing as 
well.
    Mr. Shays. But they're priced at the going rate; I mean, 
they are given an allowance----
    Ms. Fischer. Correct. The units will pay for them, yes.
    Mr. Ryan. I just want to add, if a soldier goes online he 
can buy that uniform. So the difference here is the government 
liquidators is selling large quantities, where you have your e-
Bay, which is selling more one or twosies. So in this 
particular case, in regard to your original question, from a 
national security perspective, yes, that is a problem in my 
opinion, the uniform, because it can be purchased, and someone 
who would like to take advantage of the situation could 
manipulate the facts, put that uniform on and cause some 
discomfort for other people I would believe.
    Mr. Shays. One of the most alarming things when you're 
visiting in Iraq is the concern that someone could basically 
wrap themselves in so-called body armor, but it is really a 
plastic explosive device, it would look identical. And the 
concern is that they would walk in looking like an Iraqi 
soldier or an American soldier. And what you're saying is this 
is easily ordered.
    Mr. Ryan. You can buy them, that's for sure.
    Mr. Shays. OK. Walk me through it, and then I will yield to 
Mr. Waxman--we have as much time, Mr. Waxman, as you want to 
have, and Mr. Duncan--walk me through the significance of the 
$400 million. It seems like a lot of money.
    Mr. Kutz. What we did to get the $400 million is these were 
exact matches of items that were being purchased that were 
available in new or unused condition or excellent condition in 
the excess property system for 2002 and 2003. So we did exact 
matches of what is called national stock numbers. So to the 
extent that the data was reliable in the system, which is an 
issue I mentioned in my opening statement, much of the data is 
not reliable. We had exact matches of items being bought in the 
same fiscal year that were available in the excess property 
system in new condition in the same fiscal year.
    Mr. Shays. And this is equipment supplies worth $400 
million that was excess--viewed as excess, and yet was being 
continually purchased by DOD?
    Mr. Kutz. When I say excess, it went outside of the DOD 
system. It was not reutilized within DOD. It was either sold on 
the Internet, given away or destroyed.
    Mr. Shays. So--but at the same time they were buying that 
very same equipment?
    Mr. Kutz. Correct, the identical items. It had to be an 
identical match to be part of the $400 million.
    Mr. Shays. Just so I know, before I yield to Mr. Waxman--
not yield, give him his time--Mr. Rhodes, tell me each of your 
roles in this so we understand a little bit of your expertise 
here. Did you each have different assignments?
    Mr. Rhodes. My assignment was to review some of the 
technical equipment to make certain, one, that it had not been 
used; two, that it was actually what it was described to be; 
and three, that there was some value to the equipment. For 
example, let's go to your original point about the power 
supplies. Just on the facts, item No. 1, it is true, GAO does 
not have a nuclear attack submarine. Second point is that this 
is still to this day labeled a critical shortage item by the 
U.S. Navy relative to the Seawolf attack submarine.
    Mr. Shays. It's labeled as--say that again.
    Mr. Rhodes. It's a critical shortage item.
    Mr. Shays. That was put as excess property.
    Mr. Rhodes. Yes. And third part is it had never been used, 
it had never even been screwed into something. So power supply 
in the possession of the Government Accountability Office and, 
one, we have no reason to have it and, two, it's a critical 
shortage item.
    Relative to the cryptographic gear, they had not been used, 
they had not even been plugged in because there was no wear on 
the pins where they're supposed to meet with the satellite 
calling system. There is no cryptographic keys inside of it, 
but you can understand the frequency that it runs at and things 
like that, the kinds of power that they're going to use. The 
other part is that is an NSA controlled item. The U.S. military 
is supposed to respond back to the NSA and not destroy it. 
They're supposed to go back to the National Security Agency 
about the cryptogear as part of the Uniform Cryptographic 
Architecture and say this is----
    Mr. Shays. So your point is it's one thing to have certain 
things that are dangerous and being shared, it's another thing 
to say it's excess and we no longer need it. But what you're 
saying is there is actually a specific requirement that be 
returned.
    Mr. Rhodes. Yes, sir.
    Mr. Shays. Tell me your focus, Ms. Fischer.
    Ms. Fischer. Chairman Shays, I was responsible for leading 
the audit portion of our work. That included the assessment of 
the data in the purchasing system and the excess inventory 
system and leading the work to test the inventory accuracy at 
five DMOs and five DLA supply depots.
    Mr. Shays. Mr. Ryan.
    Mr. Ryan. My job here was to help coordinate audit 
investigations, to identify items that we should purchase, to 
do investigations on seeing how they were excessed, why they 
were excessed, who purchased them, what happened to those items 
afterward. We had three agents, Agent Rodriguez, Agent Newbolt 
and Agent Brown, traveling around the country doing interviews 
with the people who were excessing them and the people who were 
buying them at the same time.
    We provided support in using our undercover capability to 
make the purchases through the governmentliquidation.com. And 
we also worked with Ms. Fischer's team to do some testing on 
shipments that were short of numbers, quantities, and track 
them through the system to see if anywhere along the way the 
DOD would have made some type of adjustments for missing items 
that were not part of original shipments.
    Mr. Shays. When I was in the Peace Corps, I was in Molokai, 
and I was invited to spend Christmas at a friend that I had 
met. His wife was an unbelievable cook, but at any rate he 
showed me--and I'm going back 30 years ago, and he showed me 
his freezer. And if you lifted up his freezer, it all said U.S. 
Government, and it appeared to me to be products that really 
were part of our military that were somehow in his possession. 
He wasn't showing me to boast about U.S. Government, he was 
just showing me that they had a lot of different food and they 
ate well.
    Mr. Waxman.
    Mr. Waxman. Thank you, Mr. Chairman. I want to thank each 
of you for the work you have done. This is really breathtaking 
to imagine that the equipment that I presume still can be used 
by our own military is being bought for pennies on the dollar, 
and if they're not being used by the military and they're being 
bought for pennies on the dollar, we're shortchanging the 
dollars we should be getting so that we can use it for the 
needs of our military in Iraq.
    Let me just verify. Are we talking about equipment that 
could be used right now by military people, our military people 
in Iraq?
    Mr. Kutz. Yes.
    Mr. Waxman. Give me a quick few examples of that.
    Mr. Kutz. Oh, I would say probably several of these things; 
certainly the medical supplies could be, the gas burner units 
possibly, the suction apparatus, and I guess the insignias and 
the uniforms possibly. So a number of these things could be.
    Mr. Waxman. So they could be used by our military in Iraq, 
and you have also testified that they could be used by our 
enemies in Iraq if they are purchased by just going on the Web 
and getting a bunch of uniforms to appear like they're American 
soldiers. Is that something we need to be worried about, Mr. 
Ryan?
    Mr. Ryan. I think that is a concern. I think the DOD should 
take a serious look at what they're excessing in regards to 
uniforms and insignias, determine if that uniform is still 
being used by our soldiers today, why are we getting rid of it. 
If it is so blatant that the uniform can be recognized by the 
humans in charge of security that it is not a current uniform, 
then I think they ought to excess it. But I think a lot of 
consideration should be given to--DOD should give a lot of 
consideration to what they're doing with the disposal of these 
uniforms, yes.
    Mr. Waxman. There are two agencies at the Department of 
Defense who are involved; is that correct, Mr. Kutz?
    Mr. Kutz. There is the Defense Logistics Agency and the 
Defense Reutilization Marketing Service, which is under DLA's 
control basically.
    Mr. Waxman. And what are they supposed to be doing; are 
they supposed to be getting rid of stuff we can no longer use 
and selling it for the most money that can make?
    Mr. Kutz. Well, DLA is in charge of buying the new items 
and supplying the troops; they do a lot of the logistic support 
for our military forces. The excess property system has many 
functions, one of them being to reutilize new and usable items 
like the ones we see here today. They also do things such as 
demilitarizing or destroying items that could be used, should 
not be having technology transferred outside of DOD. So certain 
things now like the chem-bio suits that we testified on before 
are now typically destroyed if they are, rather than sold to 
the public, which is a result of this subcommittee's prior 
hearings, a positive result of them.
    Mr. Waxman. Ms. Fischer, let me ask you this question, 
because I think it fits in with what you said was your focus. 
How is it that an ordinary retail establishment or grocery 
store in this computer age can keep track of their inventory, 
but it doesn't appear that our Defense Department can do the 
same?
    Ms. Fischer. That's a good question, Congressman Waxman, 
and you're absolutely right. But DOD has systems that are not 
integrated, it doesn't know where its various pieces of 
property are at any given time, and the systems don't give 
adequate visibility over those items for reutilization.
    Mr. Kutz. And Congressman, I'm going to be testifying 
tomorrow on that very topic before Chairman Platts and 
Representative Towns. DOD had reported over 400 duplicative 
stovepipe business systems, and of those, 2000 of them, they 
report are logistic systems. So you can imagine 2000 systems 
out there that do logistics. It's a very, very difficult 
situation for the Department to be effective with supply chain 
management with that kind of technology environment.
    Mr. Waxman. Have you given thoughts for recommendation of 
what we ought to do in Congress?
    Mr. Kutz. With respect to systems modernization?
    Mr. Waxman. Yes. These agencies are part of the Defense 
Department, we fund the Defense Department, we expect them to 
be using this property in a reasonable way, they use some 
common sense, if nothing else, but at least they have their 
systems in place. What do we need to do, scrap the system and 
recreate it, or is it fixable?
    Mr. Kutz. I think you need to do what you're doing today. 
You need to have hearings like this, and when issues like this 
are out there you need to have oversight hearings, you need to 
stick with these issues and hold DOD accountable. It's really a 
management issue. It's not really--I don't think there is any 
legislation that's not in place right now that will prevent 
them from being successful here. It's really a matter of 
leadership and management.
    Mr. Waxman. So if Congress does its oversight job, it keeps 
them honest?
    Mr. Kutz. I think that's the right thing for you to be 
doing.
    Mr. Waxman. And if we didn't do our oversight job, isn't 
there somebody in the administration that's supposed to be 
watching what goes on in the Defense Department?
    Mr. Kutz. Well, certainly the management within the 
Department of Defense is responsible, and I guess OMB also has 
some oversight over some of the systems issues governmentwide, 
whether they're e-gov initiatives and other types of oversight 
efforts. So there are other people responsible.
    Mr. Waxman. How easy are we talking about the purchase of 
these items? You've mentioned a Web site, it sounds like a 
government e-Bay service where you can go on there and pick and 
choose medals, uniforms. Can you get rocket launchers, Mr. 
Rhodes? What is the most serious thing----
    Mr. Rhodes. We were not able to procure rocket launchers.
    Mr. Waxman. What is the most serious thing that you were 
able to procure that could really endanger our security?
    Mr. Rhodes. From my technical perspective, it's difficult 
to say. I mean, I look at a tent and I see a soldier that's 
getting wet. I look at that medical equipment and I see a 
soldier that's bleeding. I look at that gasoline burner and I 
see a soldier that's cold. I look at those boots, and that's a 
soldier who's barefoot. I look at that suction apparatus, and 
there's a soldier with a chest wound from an improvised 
explosive device on the road into downtown Baghdad.
    So, I mean, all of these have their own weight and they 
have their own measure. I can't pick any one of them and say 
it's the most catastrophic.
    Mr. Waxman. Well, let me ask Mr. Ryan, because I heard 
something about an investigation of missing warheads. Do you 
know anything about that? Or circuit cards, what would those be 
used for? Do you have something--some information on----
    Mr. Ryan. Well, I defer to Mr. Rhodes in regards to 
identifying the specific purposes of the items. We were given 
the leads and we followed the investigation that we were told 
to do. So I will defer to him in relationship to the degree of 
importance or----
    Mr. Rhodes. The relative importance of a warhead. The 
argument is made that they were inert; however, the warheads 
were sitting on the back of a flatbed truck and were not 
protected nor covered. If warheads are missing, even if they're 
inert and you cut them open, then you can find out how they 
work. Inert just means they don't have explosive in them; it 
doesn't mean that you don't understand the shape of the charge, 
it doesn't mean you don't understand how they fragment, it 
doesn't mean you don't know how they fuse and arm.
    Mr. Waxman. Could somebody get a missile warhead that is 
inert through any of these systems of procurement?
    Mr. Ryan. I think in that particular case, if it's not 
coded correctly when it's going into the disposal system, much 
like these items were, then someone could requisition it. It 
all depends on the coding, the de-MIL coding of the power 
supply or the circuit card. These are examples which we were 
not supposed to get, but we did.
    Mr. Waxman. I see. So you found a lot of miscoded 
information on those things?
    Mr. Kutz. Well, let's use the example of the tent. The tent 
was coded as condemned. These boots were coded as condemned, 
and they're new and unused.
    I think what we're talking about too, before, was items 
that were lost, or losses if you will, and there were some 
things that were lost that when we did our statistical sample 
we tried to find aircraft parts, helicopter parts and chem-bio 
suits and they were gone. And body armor also was reported as 
missing. And so we did report $466 million of items that DOD 
themselves reported losses. But we became concerned about that 
because when we did our random statistical samples, when we 
looked for some of these items they were just gone and there 
was no explanation of where they had been. And Special Agent 
Ryan is doing some followup investigations on that, but we're 
not sure we're going to be able to come to resolution as to 
what happened.
    Mr. Waxman. Mr. Kutz, you suggested that we have 
congressional oversight. Do you think Congress needs to revisit 
the procurement laws themselves to spell out what can and 
cannot be contracted, either contracts, government contracts, 
obviously for services and we hear a lot about that, but these 
are government contracts for sale of items, do you think that 
ought to be covered by changes in procurement law?
    Mr. Kutz. I'm not a procurement expert. I would defer that 
question.
    Mr. Waxman. Well, it was really amazing that we're seeing 
from you these kinds of examples that are really horrifying 
when we know that our troops are not fully equipped and we're 
told we don't have the money for it. We know we have these huge 
budget deficits in this country, and yet we're finding our own 
Defense Department so wasteful in the management, maybe not 
intentionally, but wasteful nevertheless, of the costs and 
equipment and the use of items that we've purchased to make our 
country stronger. And their inefficiency I think is making our 
country weaker and our country also poorer as a result.
    Thank you very much.
    Mr. Shays. I thank the gentleman.
    Before going to Mr. Duncan, I just want to have you clarify 
a little bit. There is so much that we could be talking about 
we could keep you here a long time. And I'm going to make an 
assumption that some of what you are doing is triggering 
additional investigations; is that correct, Mr.----
    Mr. Kutz. That's correct. We are looking at some of the 
lost and potentially stolen items.
    Mr. Shays. And so just explain to me--and you said in 
excess property loss, in other words, it's literally property 
that should have been there that isn't?
    Mr. Kutz. Correct.
    Mr. Shays. And when you talk about the property loss of 
$466 million, that is what you discovered or what DOD 
acknowledges?
    Mr. Kutz. No. That's what they reported. When we became 
concerned about it was when we were doing random statistical 
samples at 10 of the locations, and some of the lots we went to 
observe basically were gone, complete lots were gone.
    Mr. Shays. Was that an infrequent occurrence? Was most of 
the time it there?
    Mr. Kutz. Most of the time things were there, but certainly 
it was enough for us to be concerned. I mentioned aircraft 
parts, chem-biosuits, helicopter parts, some of the things were 
not just concerns because of the frequency but for the types of 
things that were missing.
    Mr. Shays. But they acknowledged $466 million unaccounted 
for.
    Mr. Kutz. Correct. And again, whether they're recordkeeping 
issues or stolen or lost, nobody knows for sure.
    Mr. Shays. And we don't even know how accurate that number 
is?
    Mr. Kutz. Correct. That could be understated, overstated.
    Ms. Fischer. Because in the sample we had at the Columbus 
DRMO there were 23 examples of either entire turn-ins that were 
missing or quantities of other turn-ins that were missing, and 
they only recorded losses for two of those. They never recorded 
the losses we identified in our test work.
    Mr. Shays. So what you're telling us is, when you asked DOD 
their losses, they said $466 million, which is a very high 
number, I mean it really is. I mean, it's not $466,000, it's 
not $4.6 million, it's not $46 million, it's $466 million. 
You're saying that you encountered--a majority of those losses 
that they couldn't account for were not being stated as losses?
    Ms. Fischer. Correct. And that includes those 72 chem suits 
at the Columbus DRMO that weren't there when we did our 
testing.
    Mr. Shays. So when you identified losses just randomly, 
most of the time they weren't included as losses by DOD?
    Ms. Fischer. At the Columbus DRMO that is correct. We don't 
know across DOD because we didn't test every warehouse.
    Mr. Shays. I understand. Thank you.
    Mr. Duncan, you have the floor for 10 minutes.
    Mr. Duncan. Thank you, Mr. Chairman. I will be very brief. 
I've got some constituents waiting on me. But Mr. Kutz, how 
long have you been with the GAO?
    Mr. Kutz. A little over 13 years.
    Mr. Duncan. Have you seen any worse examples of waste in 
the time that you have been there?
    Mr. Kutz. I've seen a lot of examples of waste, that's kind 
of what we do. I'm in charge of our team that does forensic 
audits and special investigations. And so we look at fraud, 
waste and abuse across the government and there is lots of it, 
and DOD has its share.
    Mr. Duncan. Well, let me ask you this, a witness on the 
second panel will try to defend this by saying that their 
primary focus should not be on how much we made on the resale 
of these items, the important point is getting the right items 
to the warfighters when they need them while simultaneously 
providing optimal return on the investment of the American 
people. Do you regard what you found as providing optimal 
return on the investment of the American people?
    Mr. Kutz. No. The $400 million I mentioned would be a waste 
of taxpayer money directly related to the excess property 
system. The other part of the $3\1/2\ billion of waste that we 
talked about is not the fault of the excess property system; it 
is back to the logistics overbuys that are a chronic DOD 
problem, where they just buy more than they need. And by the 
time it makes it to the excess property system, you could have 
a 5 or 10-year-old computer that's really not worth much by 
that time. It's still brand new in the box, but after 5 years 
that computer is not worth a whole lot of money.
    Mr. Duncan. Well, I think most people, if they heard you 
were buying boots for less than $12 a pair on an advertisement 
in which you thought you ordered 30 boots and you ended up with 
42, 37 of which were brand new, never used before, and you 
bought them for less than $12 at the same time the Pentagon was 
ordering what, 21,000 new pairs at $135 a pair?
    Mr. Kutz. Correct.
    Mr. Duncan. Something like that. I mean, if I told that to 
people in my district they would think it's terrible.
    Mr. Kutz. I wish I could tell you that I was shocked but 
I'm just not because I have seen this kind of thing across the 
government.
    Mr. Duncan. Well, I can tell you this, most of these 
examples that you've given here today would shock most of the 
people in my district, I can tell you that. They may not be a 
shock to you because you have seen so much of it over the 
years. I mean, when you're talking about buying these half 
tents, you know, and these--all these other things that just--
sometimes pennies on the dollar. In fact the boots, I saw 
someplace where the boots were later sold to a trade company 
for 40 cents on the dollar.
    Mr. Kutz. Right. 172 pair of these extreme cold weather 
boots were sold to the Robinson Trading Co. They sold them to a 
place called Mad Dog Wholesalers in California for $5 a pair. 
Mad Dog sold them to other entities, excess property entities 
for $30 a pair, and the trail ended there, we didn't follow it 
any further, but in all likelihood they retailed them for 
something greater than $50. And that's an example where 
everybody made out but the American taxpayer.
    Mr. Duncan. Well, all I can say is, I mean, when I read all 
this about these chemical--this was from the earlier hearing, 
the chemical suits that you bought for $5 were, these items had 
an original DOD acquisition cost of $55,817 and GAO paid only 
$5 shipping cost to obtain all of them; I mean, this is just 
ridiculous. And in fact, I think that anybody who didn't work 
for the Federal Government would be embarrassed and ashamed to 
come up here and try to defend something like this like the 
witnesses on the next panel are apparently going to try to do.
    Thank you, Mr. Chairman.
    Mr. Shays. I thank the gentleman.
    Mr. Dent, do you have any questions?
    Mr. Dent. No questions.
    Mr. Shays. What I would like to do is have our counsel ask 
a few questions before we get on to our next panel, and I may 
have a few more.
    Mr. Halloran. Thank you. In the course of this work did you 
discern followup or implementation from your previous work in 
this realm? Did you see a risk assessment process for 
biological lab equipment?
    Mr. Rhodes. There is a risk process that is labeled 
interim. It is not, we aren't seeing anything finished in it. 
There was an interim process for it. It does not include 
coordination, as our recommendation made, with the scientific 
community inside or outside of DOD. Therefore, we have some 
pretty strong reservations and some strong concerns about the 
veracity of the risk assessment.
    For example, some of the equipment that we were able to get 
was just being held. That's the entire risk plan was just to 
hold on to it, once it comes in to park it and leave it.
    Mr. Halloran. To what extent would the success of even that 
interim proposal rely on data feeding it?
    Mr. Rhodes. Well, it wouldn't in this place because, one, 
it's the interim risk assessment, and the other is it didn't 
actually take in the veracity of the scientific community that 
we recommended, both inside and outside of DOD.
    Mr. Halloran. Mr. Rhodes, would you characterize the DOD 
response to the report? The DOD has seen this and had time to 
react to it; could you characterize their response?
    Mr. Kutz. I would say it's responsive, and that they're 
taking action on all 13 of the recommendations in this report.
    Mr. Halloran. I'm going to ask you to do a little better 
than that. They're taking actions such as they've said they did 
before. Are they actions that are likely to yield results in 
the near term?
    Mr. Kutz. Well, I think there's two things. In the short 
term they can't deal with the systems issue. In the short term 
they're going to have to improve human capital and processes. 
In other words, when the excess property items come into the 
system people are going to have to do a better job of 
validating the data. Right now that was one of the problems we 
saw at some of the systems at excess property locations, is 
that they were not validating data when it came into the 
system.
    So they can improve the human capital and the processes, 
but the systems is one that is a long-term situation, and 
history shows that they have not been real successful 
implementing new systems that provide integrative solutions.
    Mr. Halloran. So you're saying that based on the quality of 
the data you saw, the most critical near term thing they could 
do is improve the training of the intake of those creating the 
data at the start?
    Mr. Kutz. Yes. Validation of data and improvement of the 
quality of the data in the system is the most immediate thing 
they can improve.
    Mr. Halloran. And that's pretty doable; it doesn't require 
a multi billion dollar computer system----
    Mr. Kutz. Correct. I mean, it doesn't give you the 
integration of the excess property system in the purchasing 
system, but it at least gives you good data so you can do exact 
matches and determine what's available before you buy it.
    Mr. Halloran. Well, speaking of integration, who wants to 
tell the story of the biological safety cabinets? Because you 
saved the money on this, didn't you?
    Mr. Kutz. Mr. Rhodes can discuss that.
    Mr. Rhodes. There were a set of--it was a full set of six 
biolevel 3 safety cabinets. At an earlier hearing we came up 
and talked to you about--these are safety cabinets that are one 
level below biolevel 4. Biolevel 3, you can work with some 
extremely dangerous pathogens. We found out that this equipment 
was available. And I have a friend, a scientific friend, who is 
the head of the Biolife Sciences Center out at Dugway Proving 
Ground, and I asked him if he would like six biolevel 3 safety 
cabinets for just basically for free, DOD had to pay the 
shipment to, and he said of course I would because in the 
process--he was actually in the process of trying to set up the 
procurement of three biolevel 3 safety cabinets, and now he was 
going to get six for nothing, somebody else had to pay the 
shipping. And this is an example of equipment that was just 
being held. It had come in, had been excessed, but the DLA----
    Mr. Halloran. It had been miscoded, so it wasn't even 
visible to him, had he not looked in there----
    Mr. Rhodes. It wasn't on the Web page, it was sitting in a 
Norfolk site. And so we parlayed, we did the deal, as it were, 
we put the folks at DLA in touch with the folks at Norfolk. The 
deal was closed, and it ended up not just being three biolevel 
3 safety cabinets, but they got a whole series of absolutely 
pristine scientific equipment, including some extraordinarily 
expensive microscopes, as well as tools and cabinets and 
controls and all that.
    So I guess we returned some money to the taxpayer by making 
certain the deal got closed or something. But it was a matter 
of we knew someone, and there was no system in place for DLA to 
know the same person.
    Mr. Halloran. Your report discusses, it seems to me, 
significant extent of kind of downcoding of surplus material 
when it's turned in, and you found it, it was marked condemned 
and it's good as new. And your report refers to a broader 
phenomenon of downcoding material. Why is that? Is it error, or 
is there some incentive to do it? Mr. Ryan mentioned this 
aftermarket that likes the stuff that way. Is there some 
incentive to mark it as condemned and keeping it moving?
    Ms. Fischer. There is actually confusion I think on the 
part of the military units about what the definition of 
unserviceable is. In the interviews we did with the people that 
are turning in the excess equipment, they view unserviceable as 
meaning an item is unserviceable or unusable to them, they 
don't have a need for it. So it is unserviceable even if it's 
new and unused, so they use one of the condemned codes or codes 
that says it needs repair or something in the unserviceable 
category.
    We did talk to DOD about this even a week ago, and they 
recognized that there is training needed to resolve this 
problem, and they have started a training program.
    Mr. Halloran. That's training a lot of people. Who in the 
unit can excess something, to declare something excess?
    Ms. Fischer. Well, the people that are using the equipment 
first off. When they turn it in, they know what condition it's 
in. They know whether they have used it or not or if it needs 
repair. And we saw things at the DRMO that had signs on it or 
tags on it that said needs repair or broken. They can certainly 
identify the equipment that way.
    And then the supply and logistics units that actually 
process the turn-ins can observe it, look at it, test it, or 
ask the turn-in unit the condition of the property. And they're 
in the best position to record the condition before they turn 
it into the DRMO. And then DRMO personnel should inspect it and 
verify that the information they're getting is correct before 
they enter it in inventory. And then you would have a good 
process. You can rely on the condition, the item description, 
the quantity that's advertised as available. You wouldn't order 
something and come up short later or come up with the wrong 
item later.
    Mr. Ryan. I might add, also, that there is some success in 
coding also. I will give you an example. Up at NSA they 
disposed of several hundred computers because they changed 
systems. These computers were brand new, in a box, hadn't been 
used, but they were there for a year or two because of the 
systems change. The individual there responsible for property 
decided they were no longer serviceable, so they sent them to 
DRMO. Well, when DRMO saw them, they saw they were brand new in 
a box, and quite honestly those computers were a lot better 
than what other Federal agencies had or were using right now, 
so they upcode. They change the code to make it a very good 
product. Well, because we have special programs in this 
process, they're constantly hawking the Web site to see what 
items are coming up for new.
    Mr. Shays. Who is ``they?''
    Mr. Ryan. I'll give you an example----
    Mr. Shays. I don't understand who ``they'' is.
    Mr. Ryan. It's the Law Enforcement Sharing Organization 
[LESO]. They basically saw these computers, and they went ahead 
and requisitioned them, all of them, as soon as they became 
available. And they came and got them. And what we did is we 
followed up on those computers and we found out that they were 
warehousing these computers and did not distribute them.
    So they took them out of the hands of people that could 
actually use them. They were warehousing them for the future. 
So what it is----
    Mr. Shays. Let me understand. They are warehousing 
technology that can be dated every moment for the future?
    Mr. Ryan. Well, what the law enforcement did is they took 
them for the whole State of Kentucky. And in this particular 
case, they put them there until people needed them. And then 
they distributed them as they needed them. So it was a success 
in regards to realization if the special programs are to get 
the DOD property.
    Mr. Halloran. Finally, the testimony on the next panel is 
going to suggest that the waste in the system is somewhat 
marginal or within an almost inevitable boundary because of the 
size and scope of the DOD acquisition and operation. Do you 
concur with that?
    Mr. Kutz. If you talk about the lost and stolen, we 
wouldn't concur otherwise. There is simply shrinkage in a 
retail entity, but isn't a retail entity. This is a warehousing 
entity. And I believe if they had integrated systems, that they 
could eliminate several hundred million dollars of this waste.
    With respect to the lost property, if that is what they're 
talking about, we probably wouldn't agree with that. We are not 
talking about Charmin and toothpaste here. You're talking about 
things like body armor and chem-bio suits that are missing. So 
that is not a relevant apples and apples comparison.
    Mr. Ryan. I might add, too, that I'm not sure that the 
numbers--the numbers are understated. I think that there is 
more missing than what is reported because just in--we had a 
hard time initiating investigations. Because we didn't know 
what number to start with, when we tried to validate what the 
generator was putting in a box, we couldn't do it. The numbers 
didn't follow through. Using the example with Ms. Fischer that 
we used in Ohio, there were numerous shipments that were 
missing items.
    The generator put down 100, but when we counted the box 
when it was received, there might have only been 80. But they 
passed it through. They don't count numbers. It is a pass-
through system. So they don't spend time counting.
    So you can't tell really how much is missing, how much has 
been stolen. It is just, it is very hard to do from an 
investigator's point of view because you have no starting 
point. You need a starting point, and we didn't have one.
    Mr. Kutz. And back to the $400 million, too, again, if you 
consider the fact that the boots and tents were in the system 
as condemned, we didn't count those in the $400 million because 
those showed up as items that were unserviceable.
    We only counted items toward that were exact matches that 
were shown in the system to be new and unused or in excellent 
condition. So that number is probably larger.
    Mr. Rhodes. I just wanted to make one point about the 
difficulty in the numbers in those systems. Mr. Kutz and I have 
testified on several occasions about problems in the systems. 
If we go to our example of the dummy warheads, that is a hard 
example where we couldn't figure out what the number is. So we 
don't know if any were missing or not. Because the driver had 
one number; the deliverer had another number; the people who 
originated it had another number.
    The point I would make is that, yes, if somebody wants to 
say there is something on the margins, fine, they can go ahead 
and say that. But when you're talking about inert warheads, I 
don't know that anybody in the private sector sells inert 
warheads. Likewise with the power supply. I don't know that 
there is--we aren't talking about the margins there. We're 
talking about a critical shortage item. Also, I would make the 
point that, the fact that we were able to get that power supply 
is listed as a successful reutilization.
    So the fact that the Government Accountability Office, that 
has no Sea Wolf nuclear attack submarine, got the power supply 
for the electronic warfare system for that very same submarine 
as a critical shortage item is now listed as a successful 
reutilization.
    Mr. Shays. As I listen to this, I think that we don't have 
to make it sound worse than it is. Because it is really bad.
    And I'm also thinking that I can't imagine anyone in DOD 
wanting it to work this way. So I'm now trying to struggle with 
why it's happening.
    And I'm trying to think of what I would do if you asked me 
to be put in charge of this program. I mean, is it almost 
without certain resources and support, is it almost in your 
judgment--Mr. Kutz, if you were asked to be put in this 
program, how long do you think it would take for you to 
straighten it out.
    And I don't mean it in an arrogant way. In other words, if 
you used the best of your skills and so on, if you were coming, 
we said OK, you are going to be in charge of this program, and 
I say, OK, you're in charge, and you have this amount of time 
to do it, and, then heads roll if you don't, what amount of 
time should I give you to straighten out this problem?
    Mr. Kutz. Well certainly accountability is an issue, and I 
think there is a lot of turnover in the leadership of some of 
these areas like the DRMOs, so turnover would be an issue. I 
don't know if I'm the right person. I don't know if I could 
ever fix it any better than anybody else. DOD has some of the 
best people in world. And I'm no better or worse necessarily 
than any of those people. So I think it is a difficult system.
    Mr. Shays. Let me ask you in this way, we have 
extraordinarily capable people in DOD, but we do have 
Government limits in what they can be paid.
    Mr. Kutz. That is true.
    Mr. Shays. My understanding is that the $18 billion figure 
that is over a 2-year period is excess goods, excess material, 
correct?
    Mr. Kutz. Correct. That is the original acquisition cost 
for items. So they could be 5, 10-year-old items, but that is 
what they originally cost.
    Mr. Shays. So they originally cost $18 billion, and so some 
of them might have been used?
    Mr. Kutz. Absolutely. Most of the items are, as I mentioned 
in my opening statement, used items, in need of repair or kind 
of junk basically. The $4 billion we're talking about is some 
of the nuggets going through the system of brand new items or 
new unused items. So this is the minority of the stuff.
    Mr. Shays. Let's focus on this, on the $4 billion. And I 
hear, you know, some of my colleagues who rail against 
contracting, and Lord knows we need to do good supervision of 
contracting. But if you could get a contractor and you paid 
them $10 million, but he solved the problem with an 
organization of people, it would be money well spent. We don't 
have that capability. So we are limited, it seems to me. 
Correct me if I'm wrong. Are we able to go outside DOD and 
contract this all out potentially?
    Mr. Kutz. Yes, I mean, we do contract things out, if you 
look at the other hearings we have had with you on business 
systems modernization, and I'll say DOD right now is spending 
$13 billion a year on its business systems or $35 million a day 
for the 4,100 stovepipe duplicative systems they have, that is 
not a very good return on investment for taxpayers. And I would 
say a vast majority of that money is probably going to private-
sector contractors who are not able to or have not been able to 
solve DOD's problems. So I think some of the best minds in the 
world are working on this, and it really has been a very tough 
thing to resolve.
    Mr. Shays. So then let me, you had pages and pages of 
recommendations. List to me what you think are the most 
important recommendations.
    Mr. Kutz. Well, I'll give you mine, and I'll let the other 
folks here chime in, but I would say the issue related to 
validation of data would be No. 1 where items that are turned 
in are correctly recorded, because if you don't record them 
correctly at the very start of the process, often times we see 
that they go through the entire process in error.
    So for example, these boots or the tents that were coded as 
condemned, someone should have caught that along the process.
    Mr. Shays. When we code them, do we have the name and the 
number, or do we just have a number?
    Mr. Katz. It would be the national stock number which is a 
unique identifier for these items, a description of the items, 
the quantity, the condition code, all that.
    Mr. Shays. So someone should be able to look at it and say, 
you know, these sure as hell aren't boots.
    Mr. Kutz. Correct. And they're not doing that. That is the 
policy. The policy is, when items are turned in, they are 
supposed to be validated for the most part, and we found that 
was one of the biggest issues that wasn't happening.
    Mr. Shays. So validation of data is one. What is another 
one?
    Mr. Kutz. I'll use one more and let the other folks talk. 
The long-term integration of the purchasing system and the 
excess property system where, if someone is going to buy the 
new boots, the system does not let them buy the new boots 
because it tells them that we already have boots in the 
warehouse. To me, the integration of systems like that would be 
a major improvement of what they have and could really 
eliminate a lot of the waste I'm talking about.
    Mr. Shays. I'm not sure I fully grasp what you're saying, 
so say it over again.
    Mr. Kutz. Let's say you have an acquisition system that 
tells me that the military units need 10,000 of these boots. 
When I go to buy those 10,000 boots, the system doesn't tell me 
that there is 2,000 boots in the excess property warehouse. So 
I go buy 10,000, but I already had 2,000. If I had known there 
were 2,000, I would have only had to have bought 8,000.
    Mr. Shays. And you would have had the others right away?
    Mr Kutz. I would have had the others right away. They were 
already in the DOD warehouse.
    Mr. Shays. I'll take some other recommendations that you 
would want?
    Mr. Ryan. I think the two that I have are very similar to 
Greg's. I think there has to be some type of accountability. 
Someone has to be held responsible in the beginning of this 
process when you're entering the excess property stage. You 
have to be able to verify numbers and the conditions.
    My second recommendation is to have a complete 
modernization of this coding system, make it more user-friendly 
so that people understand it. Just because NSA can't use that 
computer, they shouldn't declare it unserviceable. Because when 
people go into the system and they see an unserviceable 
computer, they're going to back away from it because they don't 
want to get stuck with scrap. So I think it is incumbent upon 
DOD to do a better job of modernizing the coding system and the 
situations in which they're going to advertise this equipment.
    They're my two.
    Ms. Fischer. I agree 100 percent with the concern over data 
reliability and the first step being to get accurate data in 
the system because that would impair the reutilization process 
from the very beginning.
    In addition, I have a concern about an interim solution. 
The integrated systems effort is targeted for completion in 
July 2009 if it doesn't slip from that. So there is another 4 
years or so that we could be wasting a couple hundred million 
dollars a year.
    And something as simple as coming up with a way to list 
NSNs that are being purchased as well as NSNs that are flowing 
into the excess property process and being able to match those 
up----
    Mr. Shays. And NSNs are national stock numbers?
    Ms. Fischer. National stock numbers. Yes. They identify 
like items, you know, standard-use items so you know what it 
is.
    I am concerned, that they need to come up with a workable 
interim process for matching that up so that DRMOs, when they 
get something in a condition, know if that is still being 
purchased during that fiscal year. And they can let the DLA 
supply center know they have those items so they don't turn 
around and purchase the same items.
    Mr. Rhodes. My No. 1 concern, of course, would be the data 
reliability because all of these things are supposed to be 
junk. We bought junk. Well, it is not junk. It is all good.
    Mr. Shays. I want to clarify. When you say all of them 
should be junked, no, you have certain excess material that is 
excess. It is not necessarily junk. Are you saying all of these 
you bought were told were junk, were labeled as junk.
    Mr. Rhodes. Right. Yes, this was all garbage.
    Mr. Shays. Define junk and garbage to me. I'm sorry.
    Mr. Rhodes. It is considered unserviceable. It is 
considered----
    Mr. Kutz. In the system, it is recorded as unserviceable.
    Mr. Shays. Every one of these items?
    Mr. Rhodes. Every one of these items: Those sterilized 
medical supplies in packages that have never been opened, those 
circuit cards that were in sealed containers, that power supply 
that was sealed up, that suction apparatus if we break the seal 
on the pad, it will no longer be sterile. But right now, it is 
considered sterile until you break the seal. All this, these 
unused boots, this unused gas can.
    Mr. Shays. Well then how would they have--never mind.
    Mr. Rhodes. The point that I would add in to the data 
reliability, which is actually a function of the other 
recommendations had that have been made, goes back to earlier 
recommendations that we have made about understanding the value 
of the equipment. And I don't mean dollars and cents. I'm 
talking about, what does this mean? Who can use this?
    Part of that is tied into, somebody's already buying it. 
But I can't, I can't understand how I in the GAO am able to buy 
a critical shortage item, even if it is labeled as junk.
    How do I get a critical shortage item, one that I can't 
use? And the other is, it is a critical shortage item that 
someone else can use.
    Mr. Shays. Well, having been a Member of Congress for 18 
years and doing oversight for as long as I have, and as I get 
older, I get a little more impatient.
    If you were making a recommendation to the panel that 
followed to be a part of a story of success given what you 
think are the most important issues, what would be your advice? 
And then we will go to the next panel.
    Mr. Kutz leaned to you, Mr. Ryan, because he doesn't know 
what he was going to say. You're allowed to laugh, Mr. Kutz. 
That was my best attempt to be funny today.
    Mr. Ryan.
    Mr. Ryan. For the next panel that follows, I'm not really 
sure what you say to them. I think they're in a culture that 
needs to be changed. I think they're fighting an uphill battle 
with trying to live in today's modern economic world. They're 
also in an area where we as society trust people to do the 
right thing.
    Some people have a tendency to take advantage of that 
trust. From my perspective, from the law enforcement 
perspective, that is what I'm looking at. I'm looking at, how 
does someone compromise a system to get ahead? And because 
there are so many people involved in the process and the trust 
factor from point A to point B to point C must be there, that 
is something that they have to live with at that level.
    So I don't know what this panel can do at that beginning 
level to make this happen except have more accountability maybe 
for their managers. And that would be the point that I have to 
them.
    Mr. Shays. OK, thank you.
    Mr. Kutz.
    Mr. Kutz. I would say again hearings like this are very 
good to hold people accountable. It helps sharpen their focus 
on what needs to be done to fix problems, and they have to 
study up to be ready to face questions and be prepared to 
answer them. And these are tough questions. And they are going 
to be difficult to answer. But as I've said, DOD has some of 
the very best people I have dealt with in the Federal 
Government. And I know they have tried their best, and they do 
many things well at DOD. And it's always been a very ironic 
situation or difficult situation to understand how we can have 
cruise missiles that can strike within a certain distance in 
Baghdad, and we can't deal with some of these business systems. 
It is just very hard. We have talked about this before, how 
hard it is to understand how you can have that dichotomy.
    Mr. Shays. Fair enough.
    Ms. Fischer.
    Ms. Fischer. Of course, I agree with what has been said. I 
think the issue, as they move forward, because they agree with 
our recommendations--they recognize their process, improvements 
needed and systems improvements and human capital issues to 
deal with. But I think as they move forward, oversight and 
accountability is key to keep moving in the direction they need 
to move to solve this problem.
    Mr. Shays. Thank you.
    Mr. Rhodes. I would say, build the hard linkage between the 
acquisition system and the excess property system so that you 
don't--each one locks the other one out relative to an item. 
Obviously, that requires the data reliability and the internal 
controls to be very strong. But until and unless they get to 
the point where I can't buy a gasoline burner unit because 
there is one sitting over in the warehouse or I can't buy all 
these boots, because they're sitting in the warehouse--I mean, 
if you were Wal-Mart, Wal-Mart doesn't do that.
    So it is not impossible.
    RiteAid doesn't do it. All these places don't buy stuff 
they don't need, because they already have it. So, OK, there is 
a margin. We all understand that. But there is no lockout 
system currently. There is no tie between acquisition and 
excess.
    Mr. Shays. Thank you. Is there any question that we should 
have asked that we didn't ask that you want to put on the 
record? And that is a serious question.
    Is there something that you thought of and if there is a 
question that you wanted me to ask, so you don't have to 
volunteer it, because you want to say you were asked it, just 
assume I asked it.
    Mr. Kutz. I want to followup on the last hearing you had on 
the biological equipment and the chem-bio suits. We did not see 
anything of those going out the door since your last hearing. 
So that was a very positive from the hearing you had a little 
over a year ago.
    Mr. Shays. Thank you all. You have done a yeoman's work, 
and I know that you appreciate the cooperation you got from 
DOD. And I know that they appreciate your giving concrete 
recommendations besides just exposing what is not working.
    So thank you for your service. And we will get to our next 
panel.
    Let me welcome Alan F. Estevez, Assistant Deputy Under 
Secretary of Defense, Supply Chain Integration, Department of 
Defense; Major General Daniel Mongeon.
    Am I saying that correctly, sir?
    General Mongeon. Mongeon, sir.
    Mr. Shays. Pardon me, Mongeon. I'm sorry.
    And Colonel Patrick E. O'Donnell, Commander, Defense 
Reutilization and Marketing Service.
    Thank you very much.
    If you would raise your right hands.
    [Witnesses sworn.]
    Mr. Shays. Let me say from the outset that I know that all 
of you are very capable, and very dedicated, and we are blessed 
to have your service to our country. And I think you're in 
charge of something that is a mammoth undertaking.
    I will just, before you make your testimony, say, in asking 
a question of our previous panel, what they would recommend and 
the challenges, I think there is a culture, I accept in a very 
strong way that there is a culture in government that requires 
you to be a good team player. And sometimes, being a good team 
player, in my judgment, impels people who testify before a 
committee to understate the task, to not want to blame someone 
else, to take the hit, be a good soldier. And I think that 
sometimes impedes our capability to get this done.
    And so what I request is really a candid conversation about 
the tasks that you're encountering, the challenges you face, 
the lack of resources that you may have in some cases, the 
mistakes that were made, that have been made, whether by you or 
people before you.
    Not with the intention of throwing stones, but just to help 
us know how we can break through this thing, because it is, it 
is very serious. I would like to know where you think the 
progress is, but I'll be very up front with you in saying that 
I don't see the progress. I think this is a record that is just 
going around saying the same thing.
    That is the way I feel. And I do appreciate each and every 
one of you. And I know that you are doing a job I wouldn't want 
to do because I don't think I could do it.
    So, why don't we start.
    General--Mr. Estevez, am I saying your name correctly?
    Mr. Estevez. Estevez, yes, sir.
    Mr. Shays. Let me just say, and I will throw stones at 
someone else. I always ask my staff how to pronounce names. And 
the last two hearings, they've gotten one name wrong each time. 
And they've had me practice the wrong way to say it. So I no 
longer ask them with much faith.

STATEMENTS OF ALAN F. ESTEVEZ, ASSISTANT DEPUTY UNDER SECRETARY 
 OF DEFENSE (SUPPLY CHAIN INTEGRATION), DEPARTMENT OF DEFENSE; 
     MAJOR GENERAL DANIEL MONGEON, DIRECTOR FOR LOGISTICS 
 OPERATIONS, DEFENSE LOGISTICS AGENCY; AND COLONEL PATRICK E. 
   O'DONNELL, COMMANDER, DEFENSE REUTILIZATION AND MARKETING 
                 SERVICE, DEPARTMENT OF DEFENSE

                  STATEMENT OF ALAN F. ESTEVEZ

    Mr. Estevez. Thank you, Chairman Shays. And thank you for 
the opportunity to appear before you to discuss the 
Department's excess property systems.
    I'm grateful for the opportunity to provide the 
Department's views of the Government Accountability draft 
report, DOD Excess Property: Management Control Breakdowns 
Result in Substantial Waste and Inefficiency.
    Mr. Shays. I'm going to ask you to move the mic a little 
closer.
    Mr. Estevez. Yes, sir. My written statement, which I 
provided for the record, captures the number of the solutions 
we were implementing to improve the return supply chain as it 
applies to reutilization and disposal.
    Before I summarize a few key efforts that we have underway, 
I wish to commend the Government Accountability Office and 
specifically the audit team for the positive recommendations 
contained in the report. The Department is working to make 
those improvements in our excess property operations a reality.
    However, we are confident that our published policies 
regarding the Defense Reutilization and Marketing System across 
the system are sound. DOD policy states that material available 
in the disposition system will be used to the extent feasible 
to prevent buying and disposing of the same material 
simultaneously. While the return supply chain is the subject of 
this hearing, the return process is only a part of the supply 
chains that operate in the Department of Defense. The return 
process must be examined in the context of these DOD supply 
chain processes.
    Today, the Department's energies are focused on the front 
end of the supply chain where we have the greatest impact in 
supporting our forces. That is getting the warfighter what he 
or she needs as quickly as possible. Making sure that the right 
item is available causes us to stock inventory and safety stock 
worldwide, such as parts for airplanes that first flew in the 
1950's, to leading-edge electronics and medical devices.
    I would like to highlight some of our successes in 
balancing support for the warfighter with efficient management 
of our resources over the last 3 years. We are supporting a 
deployed weapon systems quickly and effectively achieving 30 to 
40 percent increases in material availability, a 70 to 80 
percent reduction in lead times, and historically high levels 
of readiness for systems deployed in Iraq today, mostly through 
the use of performance-based logistics contracts.
    Material availability has increased for those items which 
the Department manages across the key supply chains that 
support weapon systems, commodity items and our deployed 
forces.
    Today, material availability for the Defense Logistics 
Agency is 88 percent, versus a target of 85 percent, and 
backorders has hit a historic low in March 2004.
    Through aggressive partnering with industry, DLA's cost 
recovery rate, as seen on the chart on the right, entitled DOD-
DLA Cost Recovery Rates, are declining and are projected to 
continue this downward trend.
    Our inventory has decreased from a high of over $100 
billion in the 1990's to slightly over $70 billion today, even 
with increased operations. The bottom line, we are improving 
all aspects of our inventory management process. The impact can 
be seen in the increasing levels of support provided to the 
warfighter. For example, I brought a chart that shows that we 
are decreasing Air Force non mission-capable rates by reducing 
backorders which are down 55 percent for Air Force items in the 
past 4 years. There are similar results for naval aviation as 
well.
    The Department also has numerous initiatives under way to 
increase support levels to the warfighter that will also reduce 
obsolete and excess inventory. For example, readiness-based 
sparing uses advanced information technology to make better 
sparing decisions and allocate our inventory investment to best 
support readiness.
    We have established commodity teams at the services and 
Department level to work with our supply base to reduce lead 
times and improve quality which will reduce the amount of 
safety stock we carry.
    We continue to push forward with continuous process 
improvement and Lean/Six Sigma across the Department. We also 
have significant efforts underway to upgrade and integrate our 
logistics systems.
    In the areas addressed by the report, our performance is 
comparable to commercial firms who consider excess and obsolete 
write-offs the necessary cost of satisfying customers. The 
audit pointed out that over $2.2 billion of items in A 
condition--those are serviceable items that are new, used 
repaired or reconditioned--was reported to disposal as excess 
for fiscal year 2002 and fiscal year 2003. The reserve actually 
represents 1.65 percent of our average inventory values for 
those years, which is comparable to industry figures. In most 
large companies, inventory reserves ranged from 2 to 4 percent 
depending on the industry, and we do well in comparison 
considering the challenging environment we work in.
    The report stated that we had $156 million per year in 
material losses. At 1 percent of the Defense Reutilization and 
Marketing Systems total volume, this is less than our 
commercial counterparts, as you see in the third chart.
    However, we realize there is much room for improvement, 
even though our excess property performance benchmarks well 
against industry.
    Let me highlight those actions I believe can better result 
in our reutilization supply chain. I had asked the military 
services and the Defense Logistics Agency to evaluate their 
training materials and practices so we can better assess root 
causes of the various documentation errors addressed by GAO. We 
will review the current processes and procedures to determine 
if there are opportunities for tighter controls and capture of 
information at point of return which will enable DMRS to better 
categorize inventory for potential reutilization.
    We are also investigating whether to create new condition 
codes that will allow us to track condition code A items that 
are obsolete.
    In addition, one way we are addressing GAO's finding that 
we purchase at least $400 million of identical items in fiscal 
year 2002 and 2003 by using available excess items in A 
condition is by linking DLA and service systems with our 
reutilization system as they undergo modernization.
    Each of these actions is a step toward improvement in the 
Department. I expect that the synergy of all of them together 
will go a long way toward addressing the GAO report's 
recommendations, improve our performance and, most important of 
all, enhance our support to our warfighters.
    Thank you for the opportunity to testify before the 
committee. I'd be happy to answer any questions.
    [The prepared statement of Mr. Estevez follows:]

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    Mr. Shays. Thank you, Mr. Estevez.
    General Mongeon.

           STATEMENT OF MAJOR GENERAL DANIEL MONGEON

    General Mongeon. Good afternoon, Mr. Chairman, and 
distinguished members of the subcommittee. I am Major General 
Dan Mongeon, Director of Logistics Operations at the Defense 
Logistics Agency.
    I appreciate the opportunity to discuss the findings of the 
March 2005 GAO report and inform of you the actions we have 
taken and will take to improve our excess reutilization 
program.
    As the Director of Logistics Operations, I have staff 
responsibility for the procurement, management, storage and 
distribution of some 5 million line items of our military 
customers.
    The primary mission of DLA is to provide the best possible 
logistics support to America's warfighters. In accomplishing 
this worldwide mission, DLA uses four major supply centers, 
five DLA service centers, a distribution system with 26 depots, 
and a reutilization and disposal service with 92 defense 
reutilization and marketing offices [DRMOs]. DLA operates in 48 
States and 28 countries.
    With me today is Colonel Pat O'Donnell, Commander of the 
Defense Reutilization and Marketing Service [DRMS].
    Today we are here to discuss the economy and efficiencies 
of DOD's excess property reutilization program.
    DRMS has operational responsibility for the reutilization 
program and accomplishes this mission at 92 locations 
throughout the United States and in 15 foreign countries.
    Mr. Chairman, we concur with the recommendations of the GAO 
report. We recognize the issues identified in the GAO report 
and fully understand the importance of ensuring DOD has a 
viable reutilization program.
    The recommendations agree with a series of actions we had 
already initiated to increase management oversight and improve 
inventory management and property accountability of excess 
material. These actions include increased senior leadership 
involvement to monitor adherence with policy, guidelines and 
performance standards and quarterly progress briefings to the 
DLA director.
    We have also established a compliance assessment program 
geared toward policy oversight and monitoring the performance 
of DLA's reutilization and marketing program. We concur with 
the GAO conclusion that it is critical that services and DRMS 
ensure the proper assignment of condition codes.
    To address this issue, the Assistant Deputy Undersecretary 
of Defense for Supply Chain Integration directed the military 
services and DLA to review their procedures, provide accurate 
excess property return and documentation, and establish 
appropriate accountability mechanisms for the disposal of 
excess and surplus properties.
    To assist in this effort, I have directed the DRMS 
commander to work closely with the military services to improve 
training and awareness of the impact of inaccurate data. DRMS 
is developing property accounting courses for employees and 
supervisors as well as reviewing and upgrading its Web-based 
training tools for the services.
    GAO correctly recognizes deficiencies in our current 
automated systems and their impact on the concurrent purchase 
and disposal issue. Long-term solutions lie in emerging 
automated systems. Since 2004, DRMS has been working closely 
with DLA's business systems modernization design team to 
enhance support of the twofold mission of facilitating and 
reutilization of property in good condition and disposing of 
property DOD cannot use.
    A modernized disposal system will provide DLA with the 
ability to better manage both the near-term and long-term 
disposal needs of DOD.
    We agree with GAO's concerns regarding human capital 
shortages. DRMS has increased the use of contract employees, 
sent experienced personnel TDY to the most severely affected 
DRMOs and relocated some of our more experienced specialists. 
Also, the completion of the public-private A-76 competition 
will create an organizational structure that will consist of 
fewer DRMOs, ensure more efficient utilization of facilities 
and improve work load and management.
    Mr. Chairman, DLA's top priority is to support the American 
warfighter. We are confident increased leadership, oversight, 
changes in policy and procedures, modern business systems, and 
investment in human capital and resources will allow us to 
better use our resources and ensure America's fighting forces 
remain the best equipped in the world.
    I thank you, sir, and I would be happy to answer any 
questions.
    [The prepared statement of General Mongeon follows:]

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    Mr. Shays. Thank you, very much, General.
    Colonel O'Donnell, sir, you're going to need to move the 
mic closer to you.

           STATEMENT OF COLONEL PATRICK E. O'DONNELL

    Colonel O'Donnell. All right, sir, Mr. Chairman, and 
distinguished members of the subcommittee, I am Colonel Patrick 
O'Donnell, Commander of the Defense Reutilization and Marketing 
Service and the Defense Logistics Agency.
    I appreciate this opportunity to address your concerns 
regarding the reutilization of DOD excess property in our 
efforts to improve inventory accountability in the efficient 
use of DOD assets.
    DRMS is responsible for the execution of DOD policy on the 
reutilization, transfer, donation, sale and environmentally 
compliant disposition DOD excess property.
    DRMS supports U.S. forces worldwide with personnel co-
located with the military in Iraq, Kuwait and Afghanistan. We 
are committed to being good stewards of the property under our 
control and to ensuring compliance with DOD policies, 
guidelines and standards.
    We have implemented many initiatives that are at the 
forefront of reverse logistics. This includes processing 
demilitarization-required property at dedicated facilities to 
ensure proper disposition, using innovative processes for 
disposing of excess electronic equipment, and partnering with a 
private sector firm to sell property on a shared proceeds 
basis.
    In the past year, DRMS has implemented specific 
improvements to enhance reuse of excess assets within the 
Department, including providing DOD customers with additional 
online information and pre-receipt item visibility so that 
needed property can be redistributed quickly.
    We are working to ensure our systems and process 
improvements will become compatible and interactive with 
military services.
    The DOD reutilization system is trusted and regularly used 
by military service customers. And DRMS's reutilization and 
property disposal program performance measures demonstrate the 
quality of services provided.
    In fiscal year 2004, DRMS return over 160,000 line items 
with an acquisition value in excess of $1 billion to DOD 
activities. Additionally, in April 2005, DLA Office of 
Operations Research and Resource Analysis study supports DRMS's 
own analysis that its overall inventory shrinkage rate in 
fiscal year 2004 due to losses is well below 1 percent.
    DRMS recognizes its relocation of inventory accountability 
program can be improved. We are committed to correcting 
substandard performance and ensuring accountability while 
strengthening management controls to minimize such issues in 
the future. DRMS's actions to improve these programs include 
issuing a contract for commercial assistance in assessing and 
improving inventory data accuracy and developing additional 
internal audit capabilities, surveying significant generating 
activities to understand why property condition may be 
improperly classified, why local stock numbers are being used, 
and identifying barriers to using DRMS as a source of supply, 
meeting with DLA supply centers to discuss constraints they 
face in using DRMS as a source of supply and to develop program 
metrics and goals.
    DRMS is working with headquarters DLA to outline additional 
management controls and metrics to ensure proper inventory 
accountability and to synchronize the application of policy, 
oversight, education, training and program execution. We are 
also working to update our inventory accounting procedures, 
monitor inventory adjustments and losses, and reduce aging 
excess property and inventory and backlogs. DRMS spent $49 
million in facilities upgrades in fiscal years 2000 through 
2004 and plans to spend an additional $25 million in fiscal 
years 2005 through 2009.
    Mr. Chairman and distinguished subcommittee members, we 
recognize the issues noted in the GAO report and are taking 
appropriate measures to ensure they are corrected.
    DRMS stands ready to execute all policy and procedure 
changes that optimize the disposition of excess property. Thank 
you, Mr. Chairman, and I'm prepared to answer any of your 
questions.
    [The prepared statement of Colonel O'Donnell follows:]

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    Mr. Shays. Thank you all very, very much.
    What is, in each of your judgments, the biggest challenge 
that you face?
    Mr. Estevez. Interestingly enough, Mr. Chairman, I believe 
that the two issues raised by Mr. Kutz are the same two issues 
I'm going to talk about. One is training, and the second is the 
integration of our systems.
    We have folks from military units turning in material most 
of the time that they no longer need so they want to get rid of 
it, turning it into folks at DRMS who are now expecting to make 
a judgment on the value of that material if it is improperly 
coded.
    So it is important for us to ensure that the folks that are 
turning in that material are trained properly to understand the 
entire lifecycle of that material and the importance of that 
material across the Department. And it is important that our 
DRMS folks are trained to also make a judgment about that 
material and challenge as appropriate.
    And in the commercial sector, turning in something to a 
retail outlet or a retail store, they send it back to someone 
to make those judgments.
    Second, we have to have the systems integration so that, 
when our wholesale system goes out and looks and says, what do 
we need to buy in order to fulfill a military requirement that 
has come in from the field, that it is automatic that something 
that was turned in through our reutilization process is on the 
books. And we are working to do that. And in fact, in January 
2006, DLA's new Enterprise Resource Planning System will be 
integrated with the DRMS system so that those items that are 
turned into DRMS will automatically, that are in class A 
condition, that are in good condition, will be moved back into 
the inventory.
    General Mongeon. Sir, I would really echo those two 
comments. I think the training of both the services and also 
the DRMS personnel is absolutely key. And we have to be very 
vigilant in that area and continue to improve that training and 
make tools available to the services and to our employees so 
that they can improve the process.
    In terms of the systems integration, again, I totally 
concur with that comment. And we do have a fix on the horizon. 
There is really a long-term and a short-term approach. The 
short-term approach is in fact linking of the current 
management system, inventory management system, with the 
business system modernization and, as was mentioned by Mr. 
Estevez, that comes on line in January 2006. So those two would 
be the two key areas.
    The third one I would just comment on is the data 
validation. And we are working very diligently on that, in 
terms of improving our inventory accuracy and working a 
comprehensive program in terms of personnel training, inventory 
accuracy and accountability of our employees.
    Mr. Shays. Thank you, General.
    Colonel.
    Colonel O'Donnell. Sir, again, I think my comments would 
parallel those of Mr. Estevez and General Mongeon.
    Certainly, data reliability is of critical importance to us 
in the disposal business. We make all of our business decisions 
about what to do with property based on the information that we 
receive about the items that are turned in to us.
    Certainly that relates to the aspect of training that has 
already been mentioned. And again, the importance of having the 
systems integration that supports not only the buying of the 
property, the use of property, and ultimately the disposition 
of property, will take us a long way to sort of resolving all 
these problem.
    Mr. Shays. I would like to ask each of you, what you think 
the biggest success has been and your biggest failure. Not you 
personally, necessarily, but for the system.
    Mr. Estevez. I'm going to address this across-the-broad 
system, not just the reutilization system. I think we are doing 
a pretty good job. We can do better. But we're doing a pretty 
good job in getting the warfighter what he needs.
    We have decreased the time from moving high-priority 
shipments to our forces deployed in Operation Iraqi Freedom 
from about 30 days in shortly after the main operation ended to 
down to about 15 days today.
    In order to do that, we may end up having bought more than 
we need, but that is important. Because it is more important to 
have a soldier, sailor, airman, marine being able to sustain 
himself and to have those weapons platforms operating and to 
have a plane flying, than it is to have it down.
    Mr. Shays. I'm going to confirm that. And you can relate it 
to lots of different circumstances. You may invite guests to an 
event, and you can say, well, I'm going to have 30 people show 
up, but you buy for 40 because you don't want to have an 
undersupply. So I think it is a point that needs to be made. 
Sometimes we are going to have better excess supply than 
undersupply. That is OK.
    Mr. Estevez. So we are doing fairly well today moving stuff 
to support our Armed Forces in the field.
    On the reutilization side, I'll point out that we did 
reutilize about $400 million worth direct reutilization within 
the Department of Defense over the 3-year period and up to 
about $1 billion if you include some of those special program 
areas which are congressionally mandated and have the same 
rights as requisitioning material as Department of Defense 
agencies or units themselves. So we did over the period of time 
reutilize a good chunk of the material that came in.
    Now, obviously, we do need to do better on some of the 
other areas. We should not be buying $400 million at the same 
time. And those areas that I addressed previously, I believe 
will go a long way toward fixing those.
    Mr. Shays. So is your biggest failure the buying of $400 
million that you shouldn't have been buying?
    Mr. Estevez. I believe that buying concurrent with things 
that we are using in the inventory is our biggest failure.
    Mr. Shays. And tell me why you think that is going to be 
reduced?
    Mr. Estevez. That goes back two reasons, one goes back to, 
we need to train better so that they identify, but really, if 
you make those system interfaces that we discussed so that the 
buyer, who is processing numerous orders, doesn't have to 
think, it is an automatic link between his system that he is 
looking in to see what inventory we have in the wholesale 
system and what is in our reutilization system is automatically 
linked, so that he doesn't think it is bought and it is on the 
books.
    Mr. Shays. And that interface, though, that is nothing I 
see happening all that quickly. What part is being interfaced 
you say January.
    Mr. Estevez. January 2006, will be an interface between 
DLA's system that they are fielding, their enterprise planning 
system called Business Modernization System, and the system 
that Colonel O'Donnell operates called Daisy.
    Mr. Shays. It will begin, or it will be up and running 
fully implemented?
    General Mongeon. It will be fully implemented. The design 
has already been worked out, has been completely designed, and 
now, as we go to the 2.2 roll-out of our business system 
modernization process, it will be implemented. And you will 
have that automatic link.
    Mr. Shays. So, General, tell me the thing that you're most 
proud of or you consider the biggest success and what you think 
the biggest failure has been?
    General Mongeon. I think the biggest success has been DLA's 
continued business process improvements. You heard some of 
those numbers as it related to our highest level of supply 
available in terms of supporting our warfighters, our lowest 
level of back orders, direct impact on readiness of our forces 
as well as reducing the cost, the overall cost, of operating 
the Defense Logistics Agency. And you've seen that on those 
charts.
    In addition to that, our overall ability to work 
aggressively in terms of taking on inventory accountability. As 
recently as 2002, our adjustment rate was 19 percent.
    Today, in second quarter of fiscal year 2005, that has been 
reduced down to less than 5 percent, 4.6 percent. So taking on 
very seriously recommendations made on inventory accountability 
and working that very hard.
    Mr. Shays. Tell me again the percent of what? I'm sorry.
    General Mongeon. These are adjustment to inventory. In 
2002, for our distribution depots, our adjustments to inventory 
was running at 19 percent. Today, after some very aggressive 
inventory accountability measures, training, holding personnel 
accountable, that has been reduced down to, in this second 
quarter of fiscal year 2005, to less than 5 percent, 
specifically 4.6 percent.
    In terms of improvements, where we could have improved 
better or faster, I think it is in business systems 
modernization. I think it is the linkage between, as you heard, 
or the integration of the systems, so that we get a higher 
correlation between what is being purchased and what is being 
turned in in condition code A.
    We have moved very fast. But it would have been great if we 
could have moved even faster to accommodate that linkage.
    Mr. Shays. So, OK, I don't want to minimize the failures. 
In other words, your recognition of the failures, and I don't 
want us to be like, I asked someone what their biggest failure 
was or their biggest liability when I was hiring them, and they 
said they were too friendly. I want to have a better sense of 
what you think your biggest disappointment, or maybe it is 
redundant, so give me your second biggest disappointment. I 
want to have a sense that you have a sense of the failures.
    General Mongeon. Well, I think in terms of what I just 
stated, sir, is in relationship to, as was stated by Mr. 
Estevez, was in relationship to the $400 million that were 
concurrent purchases. And I was relating that to our business 
systems modernization. If we were able to move faster on that, 
we potentially could have avoided the vast majority of that 
concurrent purchase.
    Mr. Shays. But you think, do you think that actually gets 
resolved in just 6 months?
    General Mongeon. In terms of linking the visibility of 
condition code A items that are turned in to the individuals, 
the inventory item managers that are purchasing that items, we 
will be able to link the two together. So he or she will be 
aware that those items are available, can look to see if they 
in fact are in condition code A and then make those issues from 
those items as opposed to turning them in as excess.
    Mr. Shays. You are making, Mr. Estevez, Deputy 
Undersecretary, you were making a statement you turned a 
negative into a positive, and that may be very fair, but you 
basically said we wouldn't have known about the $400 million if 
we hadn't done what? I thought I was inferring from you that 
you were saying that even the fact that we--maybe someone else 
made that point--that we would have not have been able to have 
had any statistics on the $400 million had we not had something 
else in place. Am I, was that something I just invented from 
something you said?
    Mr. Estevez. I'm struggling. Because I don't remember 
saying exactly that. But I did point out that was, in my view, 
our biggest failure. And as General Mongeon just alluded to, I 
view making that systems integration, it is one of the keys, it 
is probably the key to making that fix, but I do have to point 
out that the training has to be in place because you have to 
code it properly to enter it into the system. So it has to be 
turned in at condition code A, identified as condition code A 
and logged in to the reutilization system as condition code A 
for it to move up into the higher system as available for 
reuse.
    Mr. Shays. Do we put bar codes on our products so that you 
just scan them in?
    Mr. Estevez. Depending on the, you know if it comes in, its 
performing original package, it is going to have some kind of 
marking on it.
    Mr. Shays. So you don't have to manually do it?
    Mr. Estevez. If it is a weapons platform, if it is a part 
for a weapons system, it is going to have a part mark on it. 
Some today have none, that you have to code it in. We are 
moving so that you have to scan everything in. And we are also 
moving toward the use of radio frequency identification across 
our supply chain so that it becomes an automatic entry into our 
inventory systems.
    Mr. Shays. Colonel, the thing you're the most happy about 
and the thing that troubles you the most.
    Colonel O'Donnell. Sir, I guess the thing that I'm most 
pleased with----
    Mr. Shays. Move the mic just a little closer to you, sir.
    Colonel O'Donnell. I think the thing that I am most pleased 
with overall is the value that DRMS and Defense Reutilization 
Marketing Service brings to the Department in terms of its 
ability to execute a fairly wide range of complex tasks. As I 
indicated in my opening remarks, we're responsible for not only 
selling property and reutilizing it, making sure that it is 
used as effectively as possible, prior to it having to be 
demilitarized, and our role in the environmental compliance as 
it relates to DOD's hazardous waste and hazardous materials 
excess, but those are tough challenges.
    And the men and women who make up DRMS do a yeoman's job in 
making those kinds of things happen day in and day out.
    I think the area we struggle with the most, quite honestly, 
is our ability to keep our employees as well trained as we 
absolutely need to in light of changing regulation at the 
Federal level, within the Department, to give them the best 
rules and tools that we can in order to enable them to perform 
their daily tasks at a level that is consistent with what is 
expected of us.
    Mr. Shays. So you say training is your biggest 
disappointment?
    Colonel O'Donnell. Yes, sir. Yes, sir.
    Mr. Shays. Fair enough. Before I go to our professional 
staff, we breezed through these charts. And, they're very 
familiar to you but I don't know what is on the access and so, 
so just, if you would, and Mr. Secretary, start with the DLA 
cost recovery rates are declining.
    Mr. Estevez. Simply. DLA works in a working capital fund. 
So they're funded through sales to the military services.
    Mr. Shays. Right.
    Mr. Estevez. Through the recovery costs of those sales.
    So back in the 1992 timeframe, that cost recovery was up to 
about $33.
    Mr. Shays. And the years are on your chart?
    Mr. Estevez. Yes. As you can see, the cost recovery rates 
have been declining.
    Mr. Shays. Define cost recovery rates to me. What is it?
    Mr. Estevez. That is the cost above the actual purchase 
price of an item that DLA sells it to the military services; 
DLA's working capital funded.
    Mr. Shays. Give me an example.
    Mr. Estevez. If DLA buys a part for a helicopter at $10, 
they will sell it at now $11.50 rather than $20 some years ago. 
That is how DLA operations are funded, through an additional 
tack-on on top of the cost of the price to the service.
    Mr. Shays. OK. I'm so sorry, but I'm not understanding the 
cost. I must be thinking of it in reverse.
    Mr. Estevez. DLA buys from a vendor, from Boeing, Lockheed, 
whoever, at $10, and they'll sell it to the service at $12, to 
the Army at $12. The Army gets appropriated funds from the 
Congress to buy those items at that rate.
    Mr. Shays. At $12.
    Mr. Estevez. At $12. If DLA reduces the costs that it can 
charge in overhead----
    Mr. Shays. So these are overhead costs?
    Mr. Estevez. Yes, sir. These are overhead costs. So DLA is 
becoming more efficient, and then the service has more dollars 
to buy.
    Mr. Shays. I didn't realize--these are basically overhead 
costs?
    Mr. Estevez. Yes, sir.
    Mr. Shays. And you're getting your overhead costs down?
    Mr. Estevez. Yes, sir.
    Mr. Shays. And we can assume these are fairly reliable 
statistics?
    Mr. Estevez. Absolutely.
    The second chart shows Air Force mission-capable rates, the 
correlation between mission-capable rates of weapons systems--
and that is a generic across the Air Force, so it is not for a 
particular aircraft--and the reduction in back orders. So if I 
don't have an item on back order--in other words, you're 
waiting for the item because it is not in the inventory, and it 
is not available from the industrial base--I have weapons 
systems that are sitting idle. If I decrease the back orders 
and get that material out to the force, I am decreasing the 
amount of mission-capable rates of the weapons platforms. So 
I'm getting better utilization of the material that the 
Department has bought for use to defend the American people.
    Mr. Shays. And the third one?
    Mr. Estevez. And the third one shows industry averages, by 
year, of what the industry would call shrinkage, how much the 
industry loses. And that is not just in retail operations. That 
is across, you know, warehousing and, for specific industries, 
and of course, we are a mix of industries, but industry average 
is, as you can see, about 1.7 percent across the board, and in 
our DRMS, we are down to about 1 percent, and that relates on 
the $466 million. Now that is not to say that we want to live 
with having a 1 percent unaccountable rate. We of course want 
to have a zero unaccountable rate.
    Mr. Shays. Yeah.
    Let me just tell you how we will proceed, and I think this 
will be a good way.
    General, you basically have said we can look in 6 months to 
some integration of systems, and it would seem to me and you 
said it will be online running, so I assume you'll start to 
process it in before. So if we had a hearing a year from now, 
will you all be in that same capacity a year from now or will 
we be dealing with different people?
    General Mongeon. I will not be. No, sir.
    Mr. Estevez. It is my plan to be, sir.
    Mr. Shays. Fair enough. That's good.
    Colonel.
    Colonel O'Donnell. No, sir. I will not then either.
    Mr. Shays. That triggers the question, what is the amount 
of time that someone serves in a capacity like you're in 
General.
    General Mongeon. Normally 2 years.
    Mr. Shays. Colonel.
    Colonel O'Donnell. Two years sir.
    Mr. Shays. Just, that is probably unfortunate, frankly, you 
know, but at any rate, your predecessors are going to either 
say, well, the General is right or he is wrong. Because we are 
going to get you back here, or your replacements, in a year, 
and that hopefully we will have a good story to tell. 
Hopefully, we will have a good story to tell.
    General, when would you be leaving? What is your----
    General Mongeon. Sir, I'll be leaving around October of 
this year.
    Mr. Shays. Well, we may have you be a duplicate witness 
here, so don't hide from us. We're going to have the 
professional staff ask a few questions. And what I would like 
GAO to do, and I appreciate your staying, I would like you to 
just, you know, at the end, just say the things that, just 
comment on what you've heard in this testimony.
    Yes. OK.
    Mr. Chase. Either to the general or to Mr. Secretary 
Estevez. One of the previous witnesses, Mr. Rhodes, suggested 
an improvement might be linkage between the excess property 
system and the acquisition systems, so there was no--in a 
sense--put in a lockout system. Did you have any thoughts about 
his recommendation.
    General Mongeon. Let me start out. Essentially that system 
modernization, that linkage between the inventory system that 
the DRMS is currently using, Daisy, linked to DSM, what that 
does is it identifies to the item manager that those items 
would be in condition code A, and that he should automatically 
put those in stock.
    Now, there are criteria for that in terms of his--where his 
position is. But if he is going to buy it within the next 6 
years, then it's going to automatically put it in stock.
    Mr. Chase. OK. Going back to the systems, then, you have 
indicated that January 2006 you expect completion. Now, in your 
response to GAO, in the recommendations regarding inventory 
management improvements, you mention something about full 
operational capability for the DRMS RMP will be realized in 
fiscal year 2009. Could you explain what that is, and tell us 
whether that can be implemented any sooner than fiscal year 
2009?
    General Mongeon. That is the long-term plan in terms of 
modification of the reutilization system; so that is coming on 
board after Business System Modernization. So that's the major 
integrated program for the Defense Logistics Agency, BSM. The 
long-term solution comes on with an implementation date of 
2009, so it's a more comprehensive, more sophisticated 
capability. Pat might want to add something in addition to 
that.
    So we have a near-term fix, which was mentioned by GAO as 
being very important, and we have a long-term fix, and the 
combination of those two give us where we think we need to be.
    Mr. Chase. What happens if the Business System 
Modernization program is delayed? They're still trying to count 
the number of systems they have on hand.
    General Mongeon. We are in the process of rolling out our 
Business Systems Modernization as we speak. We have met every 
milestone, so that is going very successfully. We are 
integrating about 200 customers every month, 200,000 items. We 
are learning in that process, and right now that is a very 
successful program rollout. So we have a considerable amount of 
time under our belt right now, and we anticipate that success 
will continue throughout the final rollout of the Business 
System Modernization.
    Mr. Estevez. Just to clarify there. DLA has one instance of 
a system that's being modernized, they're rolling out a 
resource planning solution. That is not the overall business 
management systems of the Department of Defense. That's their 
instance of it, and obviously that doesn't take into account 
all the finance systems in the Department or the logistics 
systems.
    DLA's rollout, for what is a commercial product, is the 
largest rollout of that product, as is the Army-specific 
rollout. And these are products that are out in the commercial 
sector and regularly used.
    Mr. Chase. I'm curious. I don't understand how brand-new 
material, unused, new, ``A'' condition material can be scrapped 
or junked. Could you explain that? I'm not sure I understand 
how something new is scrapped or is junked.
    Mr. Estevez. There's a number of reasons why.
    We have the two issues; we have stuff that we're buying 
concurrently, and then we have other stuff that's in A 
condition that may be--I won't call it junk--that we either 
donate out to other agencies, or is used somewhere else in the 
Federal Government, or it could end up being sold. It has to do 
with what's the admission of the Department, what is the status 
of that item. It can be a new item that we potentially could 
have bought and now have a technological upgrade so we no 
longer need that. We no longer use the old body armor; we use 
the new body armor because it has better protective 
capabilities for our forces.
    Mr. Shays. So what you're saying is if you have old body 
armor that's new, it's not that it's----
    Mr. Estevez. That's correct. And there is--that applies 
across the board.
    An upgrade in something, we want our forces to have the 
best that's available. And in certain instances, if it's a 
modernization of a weapons platform, then the old stuff is no 
longer needed even though it's still in new condition, because 
we just did a mod on the platform.
    Mr. Chase. Well, I understand the body armor example, but 
what about the tent example?
    General Mongeon. I would say in terms of the tent example, 
it's one of those areas where it was the condition code; the 
condition code was marked condition code H. That is part of 
what we have all said is in fact a training issue, and we have 
to work very closely with the services and with our personnel 
to ensure that those items are coded correctly. That is an item 
that we are still buying, not in large quantities, but the fact 
of the matter is they in fact were condition-coded items turned 
in, and that we should be able to pick those up. And they 
should have been in condition code A, marked in condition code 
A, so that then would have had the visibility potentially as an 
example on a want list.
    We have some automated processes, you can go to the Web; 
organizations have a want list. So let's say somebody needed 
those tents for reutilization. If it had been turned in in 
condition code A and it had been on their want list, it would 
have automatically linked up and they would have been able to 
get it.
    So going back to what Mr. Estevez said, going back to what 
Colonel O'Donnell said, training and adherence to making sure 
that the proper condition code is marked on these items is very 
important.
    Mr. Chase. When did you implement the want list program?
    Colonel O'Donnell. Sir, the want lists have been in effect 
for over a year now. And it's a tool; again, a way of trying to 
enhance our overall reutilization program by giving our 
customers, across the spectrum of military organizations, the 
ability to tell DRMS the kinds of property they need and the 
types of quantities that they're looking for. They can come on 
our Web site, give us that product, which then is screened 
against our inventories for a prescribed period of time, 
hopefully with the expectation of fulfilling the requirements.
    Mr. Chase. OK. GAO raised the question of restricted items 
that they were able to obtain. Why isn't DLA able to restrict 
unnecessary purchases?
    Colonel O'Donnell. Let me go ahead and answer that one, 
sir.
    NonDOD entities within the Federal Government can, in fact, 
acquire restricted property through a reutilization, or the RT 
program, reutilization and transformation and donation program, 
depending on where they fit in terms of eligibility.
    The decision to release property which has some sort of 
restrictive characteristic rests with GSA, who has proponency 
for property utilization throughout the Federal Government, 
which would account for why GAO could use their DODAC to come 
in and requisition that property.
    Mr. Shays. Could you just explain it? GSA, outside of DOD, 
doesn't have ownership of this; they have to give approval to 
another government agency to buy something from you?
    Colonel O'Donnell. They have to give, sir, approval for a 
nonDOD organization to withdraw property from DRMS that has a 
restrictive characteristic. Having said that, they are also 
obliged to tell that organization that they have to sign a 
statement that says you recognize that this item, for example, 
has a DRMO requirement and that you will abide by the tenets of 
that DRMO requirement when you, in turn, get ready to dispose 
of that property.
    But GSA is the proponent, if you will, for property 
reutilization throughout the Federal Government, and they are 
delegated that responsibility for DOD down to the Defense 
Logistics Agency.
    Mr. Shays. Is it your testimony that GAO would not have 
been able to buy that restricted property--excuse me, 
correction. I will say it just this way: Is it your statement 
that the only way GAO was to buy this restrictive property is 
because they were GAO, and that they would not have been able 
to buy it if they had tried to buy it privately?
    Colonel O'Donnell. That's correct, sir. Those items up on 
the podium there were requisitioned through DRMS, using a DODAC 
that had been assigned a Department of Defense activity address 
code that had been assigned to GAO, enabling them to acquire 
property from us.
    Mr. Chase. Colonel, could we move on to the point that the 
GAO made regarding the storage of material that was destroyed 
or weather damaged? They specifically said in their report, 
property was improperly stored outside for several months at 
the Huntsville liquidation sales location and I guess was 
damaged due to the hurricane. Have you gotten a handle on how 
you could prevent that in the future?
    Colonel O'Donnell. Sir, the situation that was described in 
the GAO report with respect to our facility down in Huntsville 
has, in fact, been corrected. It was a--the result, rather, of 
a series of events that sort of cascaded upon themselves.
    First and foremost was that the team that we had down at 
our sales partners office at Huntsville was unable to keep up 
with the volume of property that was coming to them in terms of 
their ability to sell it and to turn it over at a sufficiently 
rapid rate that would ensure that all the property they were 
receiving could, in fact, be stored inside. They made some 
decisions that particular management team at that particular 
site needed to be replaced, and they have, in fact, done that. 
We, DRMS, have put some additional manpower down at Huntsville 
to help monitor what is going on, not only within our sales 
partners operations, but how that all relates back to the flow 
of property from DLA depots.
    As to the fact that we had property stored outside which 
ultimately was weather damaged, again, that was a function of 
there being more property in the pipeline than our sales 
partner could deal with based on the skills, I guess, and the 
ability of the team that they had on board at the time. Again, 
we've rectified that. We've worked with our sales partner, they 
have made some significant improvements in terms of the caliber 
of folks that they had down there. And the problem that existed 
at the time of the audit no longer exists.
    Mr. Chase. So I understand that was a private contractor 
that was responsible for that location?
    Colonel O'Donnell. For the sales operation co-located at 
our DRMO at Huntsville, AL, yes, sir, that is correct.
    Mr. Chase. Were we--or have we considered trying to recover 
some of the acquisition value for that material from the 
contractor? I mean was it--you know, was it something that he 
could have prevented that maybe we should try to recover?
    Colonel O'Donnell. In this instance, no, sir, I don't think 
that's the case at all. I mean, the fact is there was more 
property coming his way than he had the capability at the time 
to deal with. But by the same token, we had a responsibility to 
say there is more property in the pipeline, let's divert that 
to another location. Which ultimately we wound up doing to help 
solve that particular situation.
    Mr. Chase. Another point raised in the report was the issue 
of missing items, 72 chemical and biology protective suits, 
protective gloves, weather parka. Given the losses that GAO 
identified, what is DLA's criminal investigative agency doing 
to access the DRMO's security and vulnerability?
    Colonel O'Donnell. Sir, the DLA Criminal Investigative 
Agency routinely conducts criminal vulnerability assessments of 
our DRMOs. And I can't speak in this particular instance, but 
those inspections take place on a routine basis; they put a 
team of investigators down there, and they look at our 
operation from the standpoint of what process improvements do 
we need to make, what do we need to do in terms of improving 
physical security, the way we handle property, the way we 
account for property. And we find those to be very, very useful 
tools.
    General Mongeon. If I might just expand on that point. The 
JS list very specifically--and I think comments were made by 
GAO in terms of when they went on to look since the last time 
of the hearing when what was discussed, they found all those 
items being available. There have been very aggressive actions 
taken, and there is an organization called the Joint Service 
MBC Equipment Assessment Team. All of that equipment and MBC-
related items now flow to those four sites. And in the past, a 
very avowed criticism that those items were in batch lots and 
they were coming in; and thus you did not have the direct 
accounting of those, because they might have said I turned in 
50 suits, and there might be more pants than jackets, etc.; 
that process was ongoing during that investigation. We no 
longer accept batch lots. All of the items that are now turned 
in, JS lists, are reviewed at those sites. They make the 
determination if they are serviceable for reutilization.
    In the last year, they have determined about $1.3 million 
worth is for reutilization; if it is not for reutilization in 
terms of being able to be used, then it is marked clearly for 
training. And if it is unserviceable, then it is turned in to 
be destroyed. I think that is one of the examples of where DRMS 
has taken and the services have taken the recommendations of 
the committee very seriously.
    Mr. Chase. That just raised another point. Have any more of 
the 250,000 BDOs turned up, the defective BDOs?
    General Mongeon. Not to my knowledge. Not to my knowledge.
    Mr. Shays. We're going to close up here. But let me be 
clear. From each of you, is there anything that GAO said--
you've said what you've agreed with in the recommendations; is 
there anything in the testimony they gave today that you would 
take issue with or would choose to qualify? I mean, we 
qualified one--and I would like GAO to respond--that the 
restrictive items that they got, they were able to get not as 
private citizens but as a government agency. Still, they 
shouldn't have gotten it. What use did it have to them?
    But is there anything else that you would have disagreed 
with what they said? And then I'll make the assumption that you 
agreed with what they said. I mean, you were here listening to 
some pretty hard stuff. Or any members, what I said, or anyone 
else said?
    Mr. Estevez. With regard to what is called waste, the stuff 
that we no longer need that goes out to--and again, I'm not 
talking about things that we do concurrent buys on. If we no 
longer need it in the Department and we excess it and it is 
reutilized either by some of the congressional mandated 
agencies that have the same rights to the materials that the 
Department of Defense has, or if it goes out to first 
responders or States or some other people that review that, 
that's valid use of that; and, in fact, it's helpful to the 
American taxpayer in many instances, or State taxpayer as the 
case may be.
    The other stuff that we no longer need that goes for sale 
through our government contractor, we believe we are getting 
the best price available. That goes for open auction. And we 
have two choices at that point. You can either not sell it and 
hold it, and there is a cost related for doing that; or you can 
get it off our books and off our management control because we 
no longer need it, and get the best return on the dollar that 
we can get at that point.
    So I'm not sure what--we keep hearing the pennies on the 
dollar point, but we are getting the best value that we can get 
through that open auction at that point, without holding that 
material for an undisclosed amount of time.
    So I just want to characterize what is being called 
``waste,'' as we view if we no longer need it, we're getting 
the best return that we can possibly get on that.
    Mr. Shays. OK. Colonel, anything that you would--Colonel, 
anything that you would want to take issue with or that you 
want to qualify that you heard from the previous panel or any 
Member of Congress?
    Colonel O'Donnell. Yes, sir. I think that Mr. Estevez has 
said the point that I would have made exceptionally well.
    Mr. Shays. If I could have GAO just join, and this is not a 
debate--I'm sorry, General.
    General Mongeon. I did have one comment, sir.
    Mr. Shays. I'm sorry, I didn't mean to overlook you.
    General Mongeon. The comment I would make is--and I use the 
gasoline burner unit as an example. While the gasoline burner 
unit is in condition code A, there is a modernization program 
going, and it happens to be called the modern burner unit. So 
as units are deploying, they are being fielded, the new item. 
And so while we have in fact sold a very small amount of these 
burners and buy a very small amount, we are in a transition 
program.
    And I think what you find in a number of these programs, a 
number of these areas, that you're in a transition program. So 
the units that we're deploying, the forces that we're 
deploying, we're deploying with the modern burner unit, the 
replacement for that. That gasoline burner is still a condition 
code A item, but in fact it is not the most modern item.
    With an example that was mentioned for the NSA computers, 
and just to embellish the point that Mr. Estevez made, in fact 
the LESO that was able to get those computers, they in fact are 
1 of the 12 congressionally mandated programs that in fact have 
access to it on an equal footing with the Department of 
Defense.
    Mr. Shays. Right, OK.
    Mr. Kutz, just tell me, from the testimony you heard here--
and this is not--this is a dialog, not a debate. But help me 
kind of sort things out; what would you find--is there anything 
that was said that basically you would want to give us your 
perspective that would differ? Or, for the most part, do you 
concur with the comments that were made?
    Mr. Kutz. For the most part. I would say a couple of 
things. The issue of shrinkage. I mean, I understand the 
perspective of the 1 percent, and we didn't look at it from 
that perspective necessarily, but it is important to note that 
we are still talking about things like body armor, aircraft 
helicopter parts, chem-bio suits and circuit cards. I'm not 
sure that is a relevant apples-to-apples comparison completely 
to say that this excess property system in the military losing 
things is the same as the retail entity losing things. So I 
think that's a broader perspective I would have on that issue.
    With respect to the items that we've requisitioned--and 
maybe we weren't clear in our testimony that we had 
requisitioned those because we didn't pay anything for those 
except a little bit of shipping. It was really the medical 
instrument chest and the parts supply and the circuit cards, we 
requisitioned those at GAO, whereas everything else we bought 
on the Internet with our undercover credit card.
    Mr. Shays. What were the two that you did at GAO?
    Mr. Kutz. Well, there were three; there were the parts 
supply, the circuit cards--exhibit 3 and 2 over there--and then 
the medical instrument chest.
    Mr. Shays. Is there any restricted item that you got not 
through GAO but as a result of just private citizen--your card?
    Mr. Kutz. No, I do not believe so.
    Mr. Shays. I mean, I just think that's important to point 
out. These still are restricted items, but it's not like I 
could have gone on and gotten them.
    I was thinking that, you know, in your work, if you assign 
people to look at something, in a way you almost hope they find 
it so you feel like you are accomplishing something and doing 
your job. But I would think your biggest satisfaction would be 
when you come back here a year from now--I didn't ask you; will 
you be in your position a year from now?
    Mr. Kutz. If you would like us to do certain studies. If 
you want us to test their system in January or whatever the 
case may be, we will work with you on that.
    Mr. Shays. I want to come back a year from now. And I would 
think your biggest satisfaction would be to--and maybe not to 
the extent that you did--but test the system out again, and to 
find that you didn't--you weren't as successful in breaking 
through the system or finding things that were being sold that 
were also being purchased. I mean, if that system works, 
General, as you hope, I would think that frankly that would say 
to GAO, gosh, we accomplished something. That would be my view.
    Mr. Kutz. Absolutely. We would agree with that.
    Mr. Shays. And General, if whoever takes your place comes 
back here--and Mr. Estevez, you will be here--and if we have 
the same story, I will feel like we failed. I will feel like 
all of us failed. So I hope we see some good success here.
    Is there anything, gentlemen, that we should have asked 
that we didn't ask that you want part of the record?
    Mr. Kutz, anything that you want to conclude with?
    Well, again, thank you for your service, and we will hope 
that we see some significant progress. Thank you. This hearing 
is adjourned.
    [Whereupon, at 4:43 p.m., the subcommittee was adjourned.]

                                 
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