Defense Inventory: Navy Needs to Improve the Management Over	 
Government-Furnished Material Shipped to Its Repair Contractors  
(23-JUL-04, GAO-04-779).					 
                                                                 
GAO has reported in a number of products that the lack of control
over inventory shipments increases vulnerability to undetected	 
loss or theft and substantially increases the risk that million  
of dollars can be spent unnecessarily. This report evaluates the 
Navy's and its repair contractors' adherence to Department of	 
Defense (DOD) and Navy inventory management control procedures	 
for government-furnished material shipped to Navy repair	 
contractors. Government-furnished material includes assemblies,  
parts, and other items that are provided to contractors to	 
support repairs, alterations, and modifications. Generally, this 
material is incorporated into or attached onto deliverable end	 
items, such as aircraft, or consumed or expended in performing a 
contract.							 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-04-779 					        
    ACCNO:   A11051						        
  TITLE:     Defense Inventory: Navy Needs to Improve the Management  
Over Government-Furnished Material Shipped to Its Repair	 
Contractors							 
     DATE:   07/23/2004 
  SUBJECT:   Accountability					 
	     Contract oversight 				 
	     Department of Defense contractors			 
	     Internal controls					 
	     Inventory control					 
	     Inventory control systems				 
	     Naval procurement					 
	     Noncompliance					 
	     Procurement records				 
	     Records management 				 
	     Repair contracts					 
	     Policies and procedures				 

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GAO-04-779

                 United States Government Accountability Office

                     GAO Report to Congressional Requesters

July 2004

DEFENSE INVENTORY

Navy Needs to Improve the Management Over Government-Furnished Material Shipped
                           to Its Repair Contractors

                                       a

GAO-04-779

Highlights of GAO-04-779, a report to the Honorable Richard J. Durbin and
the Honorable Tom Harkin, U.S. Senate; and the Honorable Peter A. DeFazio
and the Honorable Carolyn B. Maloney, House of Representatives.

GAO has reported in a number of products that the lack of control over
inventory shipments increases vulnerability to undetected loss or theft
and substantially increases the risk that million of dollars can be spent
unnecessarily. This report evaluates the Navy's and its repair
contractors' adherence to Department of Defense (DOD) and Navy inventory
management control procedures for government-furnished material shipped to
Navy repair contractors. Government-furnished material includes
assemblies, parts, and other items that are provided to contractors to
support repairs, alterations, and modifications. Generally, this material
is incorporated into or attached onto deliverable end items, such as
aircraft, or consumed or expended in performing a contract.

GAO recommends that the Navy require its repair contractors to acknowledge
receipt of government-furnished material, follow up on unconfirmed
material receipts within the established 45 days, and implement procedures
to ensure that quarterly reports of government-furnished material shipped
to repair contractors are generated and distributed to the Defense
Contract Management Agency. DOD concurred with GAO's recommendations and
provided estimated timelines for implementation of each of the
recommendations.

www.gao.gov/cgi-bin/getrpt?GAO-04-779.

To view the full product, including the scope and methodology, click on
the link above. For more information, contact William M. Solis at (202)
512-8412 or [email protected].

July 2004

DEFENSE INVENTORY

Navy Needs to Improve the Management Over Government-Furnished Material Shipped
to Its Repair Contractors

The Naval Inventory Control Point and its repair contractors have not
followed DOD and Navy inventory management control procedures intended to
provide accountability for and visibility of shipped government-furnished
material to Navy repair contractors. As a result, Navy inventory worth
millions of dollars is vulnerable to fraud, waste, or abuse. First, Navy
repair contractors are not acknowledging receipt of government-furnished
material from the Navy's supply system. Although a DOD procedure states
that contractors will notify the military services' inventory control
points once material is received, Naval Inventory Control Point officials
are not requiring its repair contractors to do so. Consequently, the Naval
Inventory Control Point is not adhering to another DOD procedure that
requires the military services to follow up with repair contractors within
45 days when the receipts for items are not confirmed. Naval Inventory
Control Point officials stated that receipting for government-furnished
material, which is earmarked for immediate consumption in the repair of
another item, might overstate the inventory levels in their inventory
management system. Without material receipt notification, the Naval
Inventory Control Point cannot be assured that its repair contractors have
received the material. For fiscal year 2002, the most recent and complete
data available at the time of GAO's review, the Naval Inventory Control
Point reported that 4,229 government-furnished material shipments
(representing 4,301 items value at approximately $115 million) had been
shipped to its repair contractors. GAO randomly selected and examined 308
government-furnished material shipments, representing 344 items that were
shipped to the Navy's repair contractors. Based on this random sample, GAO
estimated that 50 unclassified items may be unaccounted for, with a value
of about $729,000 in aircraft-related government-furnished material.

Additionally, the Naval Inventory Control Point does not send quarterly
reports on the status of government-furnished material shipped to its
repair contractors to the Defense Contract Management Agency. DOD and Navy
procedures require that the Naval Inventory Control Point generate and
distribute quarterly reports on government-furnished material shipped to
repair contractors, including information on total shipments and their
dollar value, number of shipments for which receipts are unknown, and
rejected requisitions to the Defense Contract Management Agency. Although
there are a number of DOD and Navy procedures that outline this reporting
requirement, the Naval Inventory Control Point officials responsible for
implementing this procedure were unaware of the requirement. The Naval
Inventory Control Point lacks procedures to ensure that these reports are
generated and distributed to the Defense Contract Management Agency.
Without the reports, the Defense Contract Management Agency may be unable
to independently verify that the Navy repair contractors have accounted
for all government-furnished material shipped to them.

Contents

       Letter                                                               1 
                                     Results in Brief                       3 
                                        Background                          5 
                  Inventory Management Control Procedures Are Not Being   
                                         Followed                           8 
                                        Conclusion                         12 
                           Recommendations for Executive Action            12 
                                      Agency Comments                      13 
     Appendix I                    Scope and Methodology                  
    Appendix II   Comments from the Department of Defense                 
    Appendix III           GAO Contact and Staff Acknowledgments          

Related GAO Products

  Table

Table 1: Fiscal Year 2002 Government-Furnished Material Shipments by
Number and Value

This is a work of the U.S. government and is not subject to copyright
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copyright holder may be necessary if you wish to reproduce this material
separately.

United States Government Accountability Office Washington, DC 20548

July 23, 2004

The Honorable Richard J. Durbin The Honorable Tom Harkin United States
Senate

The Honorable Peter A. DeFazio The Honorable Carolyn B. Maloney House of
Representatives

As we have reported in a number of our products, the lack of control over
inventory shipments increases vulnerability to undetected loss or theft
and substantially increases the risk that millions of dollars will be
spent unnecessarily. Since at least 1990, we have considered Department of
Defense (DOD) inventory management to be a high-risk area because
inventory management systems and procedures are ineffective. (A list of
related GAO products appears at the end of this report.)

In July 2002, we reported on the Air Force's noncompliance with inventory
management control procedures that led to inventory worth billions of
dollars being vulnerable to fraud, waste, or abuse.1 In response to your
request for us to review the Navy and Army inventory management procedures
for controlling inventory shipped to repair contractors, we evaluated the
Navy's and its repair contractors' adherence to DOD and Navy inventory
management control procedures for government-furnished material2 shipped
to Navy repair contractors. As agreed with your offices, we plan to
initiate a review of the Army's and its repair contractors' adherence to
DOD and Army inventory management control procedures for shipped
government-furnished material, as well as items for repair that are
provided to Army repair contractors.

1 U.S. General Accounting Office, Defense Inventory: Air Force Needs to
Improve Control of Shipments to Repair Contractors, GAO-02-617
(Washington, D.C.: July 1, 2002).

2 Government-furnished material is material in the possession of, or
acquired by, the government and later delivered or otherwise made
available to a contractor. It includes assemblies, components, parts, raw
and process material, and small tools and supplies that contractors use in
support of repairs, alterations, and modifications. Generally, this
material is incorporated into or attached onto deliverable end items, such
as aircraft, or consumed or expended in performing a contract. Additional
details regarding how the Navy further defines government-furnished
material are included in appendix I.

The Navy contracts with private companies (i.e., repair and production
contractors) to produce, maintain, and repair its equipment. In some
cases, the Navy furnishes the material necessary to perform the repairs at
the contractors' locations. Responsibility for controlling this material
is shared among the Naval Supply Command, the Naval Inventory Control
Point, the Defense Logistics Agency, repair contractors, and the Defense
Contract Management Agency. The Naval Supply Command administers the
Navy's supply system and provides inventory management policies and
procedures. The Naval Inventory Control Point procures, manages, and
supplies inventory for naval aircraft, submarines, and ships worldwide.3
The Defense Contract Management Agency assesses the accuracy of repair
contractor records and accounts for all government property furnished to a
contractor.4

Our objective was to determine whether the Naval Inventory Control Point
and its repair contractors adhere to DOD and Navy inventory management
control procedures governing the accountability for and visibility of
shipped government-furnished material. We did not review the Navy
inventory management control procedures for items needing repair that are
provided to Navy contractors because of a recent June 2003 DOD Office of
the Inspector General report.5 While the Inspector General's report
indicated that the Navy had taken actions to improve its procedures and
controls to account for these items at commercial repair facilities, it
found that additional improvements were needed to improve the monitoring
and oversight of shipped inventory.6

To assess the Naval Inventory Control Point's and its repair contractors'
adherence to DOD and Navy inventory management control procedures

3 The Naval Inventory Control Point serves as the Management Control
Activity for the Navy Supply Command. The Management Control Activity is a
Navy activity or DOD activity delegated by the Navy that is responsible
for validating all requisitions for government-furnished material shipped
to contractors. The Management Control Activity is also responsible for
submitting government-furnished material status reports to the Defense
Contract Management Agency.

4 The Defense Contract Management Agency property administrators are
charged with carrying out this responsibility.

5 Department of Defense Office of the Inspector General, Logistics:
Followup Audit of Depot-Level Repairable Assets at Selected Army and Navy
Organizations, D-2003-098 (Arlington, Virginia: June 5, 2003).

6 Until the inventory reaches its intended destination, the Naval
Inventory Control Point refers to it as in-transit, which is also referred
to as shipped inventory.

  Results in Brief

related to government-furnished material shipped to repair contractors, we
randomly selected and examined 308 government-furnished material
shipments. These shipments represented 344 items that were shipped to Navy
repair contractors in fiscal year 2002, the most recent and complete data
available at the time of our review. We sent surveys to 29 Navy repair
contractors requesting data on these unclassified, classified, and
sensitive shipments valued at about $11.9 million.7 We received survey
responses from 20 of the 29 contractors, representing 207
government-furnished material shipments (corresponding to 243 items). Our
review focused on the Naval Inventory Control Point facility located in
Philadelphia, Pennsylvania, which manages aircraft-related inventory.8 We
assessed the reliability of the data used in this report and determined
that the data were sufficiently reliable for our purposes.

We conducted our review from March 2003 through April 2004 in accordance
with generally accepted government auditing standards. More details about
our scope and methodology appear in appendix I.

The Naval Inventory Control Point and its repair contractors have not
followed DOD and Navy procedures intended to provide the accountability
for and visibility of inventory shipped to Navy repair contractors.
Specifically, Navy repair contractors are not routinely acknowledging
receipt of government-furnished material received from the Navy. A DOD
procedure requires repair contractors to acknowledge receipt of
government-furnished material9 that has been shipped to them from the
Navy's supply system.10 However, Naval Inventory Control Point officials
are not requiring repair contractors to acknowledge receipt of
government-furnished material that they have received from this system. By
not requiring repair contractors to acknowledge receipt of
governmentfurnished material, the Naval Inventory Control Point has also
departed

7 Classified items are those that require the highest degree of protection
in the interest of national security. Sensitive items-those that are high
value, highly technical, or hazardous in nature and small arms,
ammunition, explosives, and demolition material-require a high degree of
protection and control due to statutory requirements or regulations.

8 Hereafter referred to as Naval Inventory Control Point.

9 DOD 4000.25-2-M, Military Standard Transaction Reporting and Accounting
Procedures (MILSTRAP), September 2001 (as amended by changes 1&2),
paragraph C6.6.

10 For purposes of this report, the Navy's supply system refers to
inventory stored at and shipped from Navy warehouses, contractor
facilities, and manufacturer facilities.

from the procedure to follow up with the contractor within 45 days when
the contractor fails to confirm receipt for an item.11 Without material
receipt notification, the Naval Inventory Control Point cannot be assured
that its repair contractors have received the shipped material. This
failure to acknowledge receipt of material shipped to repair contractors
can potentially impair the Navy's ability to account for shipments leading
to possible fraud, waste, or abuse. For fiscal year 2002, the most recent
and complete data available at the time of our review, the Naval Inventory
Control Point reported that 4,229 government-furnished material shipments
had been shipped to its repair contractors. These shipments had a value of
approximately $115 million. We randomly selected and examined 308
government-furnished material shipments, valued at approximately $11.9
million, and surveyed 29 Navy repair contractors to determine if they had
recorded receipts for these shipments in their property records. The Navy
repair contractors had documented receipts for all classified shipments.
However, they were unable to document the receipts for 4 of the
unclassified shipments (representing 4 items) in our sample. Because our
sample was randomly selected, it was estimated that 50 unclassified items
may be unaccounted for, with a value of about $729,000 in inventory of
aircraft-related government-furnished material for fiscal year 2002.12

Additionally, the Naval Inventory Control Point does not send quarterly
reports on the status of shipped material to the Defense Contract
Management Agency. DOD and Navy procedures require that the Naval
Inventory Control Point generate quarterly reports on governmentfurnished
material shipped to repair contractors, including information on total
shipments and their dollar value, number of shipments for which receipts
are unknown, and rejected requisitions to the Defense Contract Management
Agency.13 However, the Naval Inventory Control Point does not have
procedures in place to ensure that these quarterly reports are

11 DOD 4000.25-2-M, Military Standard Transaction Reporting and Accounting
Procedures (MILSTRAP), September 2001 (as amended by changes 1&2),
paragraph C6.7.

12 This is the mean value based on our analysis. We are 95 percent
confident that between 4 and 98 items are unaccounted for with a value of
between $58,300 and $1,428,350.

13 DOD 4140.1-R, DoD Supply Chain Materiel Management Regulation, May 23,
2003, paragraph C5.11.2.4; DOD 4161.2-M, DoD Manual for the Performance of
Contract Property Administration, December 1991, paragraph C5.2.6; and
SECNAVINSTR 4440.32A, Control of Contractor Access to DoD Material
Inventories and Determinations for the Supply of Government Furnished
Material, September 27, 1991, paragraph 6d(5)(b).

Background

generated and distributed to the Defense Contract Management Agency.
Without these reports, the Defense Contract Management Agency may be
unable to conduct an independent verification that the Navy repair
contractors have accounted for all government-furnished material shipped
to them.

We are making three recommendations to strengthen the Navy's compliance
with existing inventory management procedures for controlling
government-furnished material shipped to its repair contractors. In
written comments on a draft of this report, DOD concurred with our
recommendations and provided estimated timelines for implementation of
each of the recommendations.

The Naval Inventory Control Point authorizes movement of its inventory
from the Defense Logistic Agency,14 Navy-managed shipping and receiving
activities, and Navy repair contractors. With prior approval from Naval
Inventory Control Point item managers, Navy repair contractors can also
use material located at their facilities. DOD procedures and Federal
Acquisition Regulation procedures generally require that repair
contractors establish and maintain an internal property control system for
the control, use, maintenance, repair, protection, and preservation of
government property in their possession.15

The Navy currently has 359 repair contractors using its Web-based
inventory management system, known as the DOD Commercial Asset Visibility
System. This system provides the Navy with asset reporting coverage for
more than 95 percent of its commercial repair business.

For fiscal year 2002, the most recent and complete data available at the
time of our review, the Naval Inventory Control Point reported that 4,229
government-furnished material shipments (representing 4,301 items valued
at approximately $115 million) had been shipped to its repair contractors.
Table 1 shows the derivation of the sample size of our survey, including
the number and value of shipments for which we received survey responses.

14 The Defense Logistics Agency-which operates and manages 23 storage
depots- receives, stores, and issues inventory and maintains inventory
records.

15 DOD 4161.2-M, DoD Manual for the Performance of Contract Property
Administration, December 1991, paragraph C3.4; Federal Acquisition
Regulation (FAR), Subpart 45.502.

Table 1: Fiscal Year 2002 Government-Furnished Material Shipments by
Number and Value

               Categories of government-  Number of  Number of  
            furnished material shipments  shipments       items         Value 
           Universe of shipments to Navy                        
                      repair contractors       4,229      4,301  $115,310,392 

Audit sample shipments

o  Unclassified and sensitive 302 338 9,652,910

o  Classified 6 6 2,241,116

 Total sample shipments 308 344 $11,894,026 Total shipments captured in survey
                                   responses

a

207 243 $9,922,155

Source: GAO's analysis of Naval Inventory Control Point data.

aThese shipments represent 67 percent of the total sample shipments. All
classified shipments and dollar values are included in this category. Nine
of the repair contractors in our survey did not provide data for the
remaining 101 shipments, or 33 percent of our total sample.

DOD requires the Navy to use a number of procedures to monitor items
shipped to and received by repair contractors. First, the recipient of the
material is responsible for notifying the Naval Inventory Control Point
once an item has been received. If the Naval Inventory Control Point has
not been provided a receipt within 45 days of shipment, it is required to
follow up with the intended recipient.16 The rationale behind these
requirements is that until receipt is confirmed, the exact status of the
shipment is uncertain and therefore vulnerable to fraud, waste, or abuse.
The Naval Inventory Control Point is also required by DOD and Navy
procedures to submit quarterly reports to the Defense Contract Management
Agency identifying all government-furnished material that has been
provided to a contractor.17 These reports allow the Defense Contract
Management Agency to independently verify that Navy repair contractors
have accounted for all government-furnished material shipped

16 DOD 4000.25-2-M, Military Standard Transaction Reporting and Accounting
Procedures (MILSTRAP), September 2001 (as amended by changes 1&2),
paragraphs C6.6 and C6.7.

17 DOD 4140.1-R, DoD Supply Chain Materiel Management Regulation, May 23,
2003, paragraph C5.11.2.4; DOD 4161.2-M, DoD Manual for the Performance of
Contract Property Administration, December 1991, paragraph C5.2.6; and
SECNAVINSTR 4440.32A, Control of Contractor Access to DoD Material
Inventories and Determinations for the Supply of Government Furnished
Material, September 27, 1991, paragraph 6d(5)(b).

to them. As a result, the Defense Contract Management Agency does not have
to rely strictly on records provided by Navy repair contractors.

In addition to these DOD and Navy procedures, the Navy, as a
representative of the federal government, is also obligated to establish
and maintain effective internal control systems. The Federal Managers'
Financial Integrity Act of 198218 requires the General Accounting Office
to issue standards for internal control in government.19 According to
these standards, internal control is defined as an integral component of
an organization's management that provides reasonable assurance that the
following objectives are being achieved: (1) effectiveness and efficiency
of operations, (2) reliability of financial reporting, and (3) compliance
with applicable laws and regulations. A subset of these objectives is the
safeguarding of assets. Internal control should be designed to provide
reasonable assurance regarding prevention of or prompt detection of
unauthorized acquisition, use, or disposition of an agency's assets.
Effective and efficient internal control activities help ensure that an
agency's control objectives are accomplished. The control activities are
the policies, procedures, techniques, and mechanisms that enforce
management's directives, such as the process of adhering to DOD
requirements for receipt of government-furnished material and issuance of
quarterly government-furnished material status reports.

DOD annually ships inventory valued at billions of dollars to various
locations around the world. For years, DOD has had difficulty tracking
this inventory from origin to destination. The accountability problem with
shipped inventory is part of a more global issue. Since at least 1990, we
have considered DOD's inventory management to be a high-risk area because
DOD's inventory management procedures are ineffective. The lack of
adequate controls over shipped inventory and the resulting vulnerability
to undetected loss or theft have been major areas of concern. In March
1999, we reported that significant weaknesses existed at all levels of the
Navy's shipped inventory management structure, leading to potential theft
or undetected losses of items and demonstrating inefficient

18 31 U.S.C. 3512(b).

19 U.S. General Accounting Office, Internal Control: Standard for Internal
Control in the Federal Government, GAO/AIMD-00-21.3.1 (Washington, D.C.:
Nov. 1999).

  Inventory Management Control Procedures Are Not Being Followed

and ineffective logistics management practices.20 We concluded that these
weaknesses and the problems they created were primarily a result of the
Navy not following its own procedures regarding controls over shipped
inventory. In following up with the Navy, we found that the Navy had
implemented many of our recommendations that have improved the
accountability over its shipped inventory. According to Naval Inventory
Control Point officials, at least 75 percent of their shipped inventory
discrepancies have been resolved. Also, according to a June 2003 DOD
Office of the Inspector General report, the Navy had taken actions to
improve its procedures and controls to account for items repaired at
commercial repair facilities. However, the DOD Office of the Inspector
General found that additional improvements were needed to improve the
monitoring and oversight of shipped inventory.21

The Naval Inventory Control Point and its repair contractors are not
following DOD inventory management control procedures governing the
accountability for and visibility of government-furnished material shipped
to its repair contractors. As a result, this inventory is vulnerable to
loss or theft. First, the Naval Inventory Control Point is not following a
DOD procedure that requires repair contractors to acknowledge receipt of
government-furnished material that has been shipped to them from the
Navy's supply system. Consequently, the Naval Inventory Control Point is
not following another DOD procedure that requires it to follow up with its
repair contractors that have not confirmed receipt of shipped material.
Additionally, the Naval Inventory Control Point is not following DOD and
Navy procedures that require quarterly reports on the status of
government-furnished material shipped to Navy repair contractors be
provided to the Defense Contract Management Agency.

20 U.S. General Accounting Office, Defense Inventory: Navy's Procedures
for Controlling In-Transit Items Are Not Being Followed, GAO/NSIAD-99-61
(Washington, D.C.: Mar. 31,1999).

21 Department of Defense Office of the Inspector General, Logistics:
Followup Audit of Depot-Level Repairable Assets at Selected Army and Navy
Organizations, D-2003-098 (Arlington, Virginia: June 5, 2003).

    Navy Is Not Requiring Its Repair Contractors to Acknowledge Receipt of
    Government-Furnished Material

Navy repair contractors are not routinely acknowledging receipt of
government-furnished material that has been shipped to them from the
Navy's supply system. According to a DOD procedure, repair contractors
must enter shipments into their inventory records and notify the inventory
control point when material has been received. This material receipt
acknowledgment is designed to maintain accountability for all shipped
items, including government-furnished material that has been shipped to
Navy repair contractors in usable condition from the Navy's supply system.
Additionally, the Navy must adhere to internal control standards outlined
by the General Accounting Office, such as providing assurance that assets
are safeguarded against unauthorized acquisition, use, or disposition.

Navy repair contractors are not routinely adhering to the DOD procedure to
acknowledge receipt of government-furnished material shipped to them
because Naval Inventory Control Point officials are not requiring them to
do so. By not requiring repair contractors to receipt, the Naval Inventory
Control Point does not follow up with its repair contractors within 45
days-as required by DOD procedure-when these repair contractors fail to
confirm receipt of government-furnished material shipped to them. Naval
Inventory Control Point officials acknowledged that they only become aware
that a contractor has not received an item if the contractor inquires
about the shipment.

Naval Inventory Control Point personnel provided several reasons why Navy
repair contractors are not being required to notify the Naval Inventory
Control Point of material receipt. They indicated that the Naval Inventory
Control Point does not require its repair contractors to acknowledge
receipt of government-furnished material because such material is provided
with the expectation that it will immediately be consumed in the repair of
other items. Naval Inventory Control Point officials also stated that
submitting notification of receipt for this material might overstate the
inventory levels in the DOD Commercial Asset Visibility System-the Navy's
inventory management system-because the system would show this material as
on-hand at its repair contractors' facilities when the material is
actually earmarked for immediate use in the repair of another item.

We have noted the Naval Inventory Control Point officials' concerns about
the potential for notification of receipt of government-furnished material
to overstate inventory levels. However, one of the Navy repair contractors
in our review currently uses the DOD Commercial Asset Visibility System to
enter receipt of government-furnished material, without overstating the

inventory levels maintained within the system. Specifically, the Navy
repair contractor is using a standard module of the DOD Commercial Asset
Visibility System to enter receipt of material received in usable
condition from the Navy's supply system. Upon entering a receipt of
material in the system, the contractor then issues the item to itself for
immediate use in the repair of another item. This process eliminates the
possibility of adverse impacts to inventory levels. However, the Naval
Inventory Control Point is not using this module of the DOD Commercial
Asset Visibility System for the receipt of material received in usable
condition. Additionally, in our previous Air Force report on shipments to
repair contractors,22 we found that in contrast to the Navy, the Air Force
requires repair contractors to issue a notification of receipt for
material that they have received.

For fiscal year 2002, the most recent and complete data available at the
time of our review, the Naval Inventory Control Point reported that 4,229
government-furnished material shipments (representing 4,301 items valued
at approximately $115 million) had been shipped to its repair contractors.
We randomly selected and examined 308 governmentfurnished material
shipments, representing 344 items that were shipped to Navy repair
contractors. We surveyed 29 Navy repair contractors to determine if they
had recorded receipts for these shipments in their property records. The
repair contractors had recorded receipts for all classified shipments.
However, they could not document the receipt of 4 unclassified shipments
(representing 4 items). Because our sample was randomly selected, the
results can be projected to the entire universe of government-furnished
material managed by the Naval Inventory Control Point. We estimate that 50
unclassified items may be unaccounted for, with a value of about $729,000
in inventory of aircraft-related governmentfurnished material for fiscal
year 2002.23

Lack of contractor notification has impeded the Naval Inventory Control
Point's visibility of government-furnished material. Without such
notification, the Naval Inventory Control Point cannot be assured that its
repair contractors have received all shipped material. Finally, because
the Naval Inventory Control Point does not have data on unconfirmed
government-furnished material shipments, it lacks the ability to

22 See GAO-02-617.

23 This is the mean value based on our analysis. We are 95 percent
confident that between 4 and 98 items are unaccounted for with a value of
between $58,300 and $1,428,350.

Navy Is Not Submitting Required Quarterly Reports

independently know when corrective actions, such as resolving inventory
discrepancies, are needed. As a result, the Navy's inventory continues to
be at risk of fraud or loss.

The Naval Inventory Control Point is also not following DOD and Navy
procedures that require Naval Inventory Control Point officials to provide
the Defense Contract Management Agency with quarterly status reports
showing all shipments of government-furnished material that have been
provided to its repair contractors.24 According to the procedures, these
reports should include information about total shipments and their dollar
value, number of shipments for which receipts are unknown, and rejected
requisitions. The purpose of the reports is to assist the Defense Contract
Management Agency in independently verifying contractor records of
government-furnished material.

A Navy procedure designates individuals within the inventory control point
to serve as the management control activity to, among other things,
generate and distribute the required quarterly government-furnished
material status reports.25 According to Naval Inventory Control Point and
Defense Contract Management Agency officials, the inventory control point
has not provided the Defense Contract Management Agency with the required
quarterly reports. The inventory control point officials stated that they
were unaware of the requirement to provide quarterly reports to the
Defense Contract Management Agency. Although a number of standard DOD and
Navy inventory management control procedures stipulate the requirement to
generate and distribute the quarterly reports, inventory control point
officials lack recognition of this reporting requirement. The Naval
Inventory Control Point currently lacks procedures to ensure that these
quarterly reports are generated and distributed to the Defense Contract
Management Agency as required by DOD and Navy procedures.

24 DOD 4140.1-R, DoD Supply Chain Materiel Management Regulation, May 23,
2003, paragraph C5.11.2.4; DOD 4161.2-M, DoD Manual for the Performance of
Contract Property Administration, December 1991, paragraph C5.2.6; and
SECNAVINSTR 4440.32A, Control of Contractor Access to DoD Material
Inventories and Determinations for the Supply of Government Furnished
Material, September 27,1991, paragraph 6d(5)(b).

25 SECNAVINSTR 4440.32A, Control of Contractor Access to DoD Material
Inventories and Determinations for the Supply of Government Furnished
Material, September 27,1991, paragraphs 4c and 6d(2)(d).

Conclusion

Recommendations for Executive Action

Proper distribution of the quarterly status reports is vital to the
management of government-furnished material. A 1995 DOD Inspector General
audit report of management access to DOD's supply system asserted that the
Defense Contract Management Agency serves as the last line of defense in
protecting material resources and needs an independent record of the
government-furnished material shipped to repair contractors. These
quarterly reports serve as such a record and prevent the Defense Contract
Management Agency from having to rely solely on the repair contractors'
records of government-furnished material.

Inventory worth millions of dollars is vulnerable to fraud, waste, or
abuse because the Naval Inventory Control Point is not adhering to DOD
inventory management control procedures for government-furnished material
shipped to its repair contractors. Because the Naval Inventory Control
Point has not required its repair contractors to acknowledge receipt of
government-furnished material, it will continue to lack assurance that its
repair contractors have received shipped material. In addition, without
requiring receipts, the Naval Inventory Control Point will be unable to
follow up on unconfirmed material receipts within the required 45 days. As
a result, the Naval Inventory Control Point will continue to lose the
ability to understand inventory management weaknesses and take necessary
corrective action. Furthermore, without the Naval Inventory Control Point
implementing procedures to ensure that quarterly reports for all shipments
of government-furnished material to its repair contractors are generated
and distributed to the Defense Contract Management Agency, the Defense
Contract Management Agency might be impaired in its ability to serve as
the last line of defense in protecting government-furnished material.

To improve the control of government-furnished material shipped to Navy
repair contractors, we recommend that the Secretary of Defense direct the
Secretary of the Navy to instruct the Commander, Naval Inventory Control
Point, to implement the following three actions:

o  	Require Navy repair contractors to acknowledge receipt of material
that is received from the Navy's supply system as prescribed by DOD
procedure.

o  	Follow up on unconfirmed material receipts within the 45 days as
prescribed in the DOD internal control procedures to ensure that the Naval
Inventory Control Point can reconcile material shipped to and received by
its repair contractors.

o  	Implement procedures to ensure that quarterly reports of all shipments
of government-furnished material to Navy repair contractors are generated
and distributed to the Defense Contract Management Agency.

In written comments on a draft of this report, DOD concurred with our
recommendations and provided estimated timelines for implementation of

                                Agency Comments

each of the recommendations. DOD's written comments on this report are
reprinted in their entirety in appendix II.

As arranged with your offices, unless you publicly announce its contents
earlier, we plan no further distribution of this report until 30 days from
its
issue date. At that time, we will send copies of this report to the
appropriate congressional committees; the Secretary of Defense; the
Secretary of the Navy; the Director, Office of Management and Budget; and
the Director, Defense Logistics Agency. We will also make copies available
to others upon request. In addition, the report will be available at no
charge on the GAO Web site at http://www.gao.gov.

William M. Solis
Director
Defense Capabilities and Management

                       Appendix I: Scope and Methodology

For the purposes of this review, government-furnished material is defined
as either (1) usable items (commonly referred to as "A" condition items
that the Naval Inventory Control Point directs to be shipped from Navy
wholesale warehouses to its repair contractors or (2) items that the Navy
repair contractors have repaired to usable condition and issued to
themselves to use in completing the repair of another item. According to
Naval Inventory Control Point officials, their use of government-furnished
material occurs in three different circumstances where an item is needed
to complete the repair of another item because the item in question is (1)
missing when the other item is inducted for repair, (2) beyond repair or
beyond economical repair, or (3) needed to complete the expeditious repair
of another item.

To assess the Naval Inventory Control Point's and its repair contractors'
adherence to procedures for controlling government-furnished material, we
took the following steps:

o  	To identify criteria for controlling shipped inventory, we reviewed
Department of Defense (DOD) and Navy procedures, obtained other relevant
documentation related to shipped inventory, and discussed inventory
management procedures with officials from the following locations:
Headquarters, Department of the Navy, Washington, D.C.; the Naval
Inventory Control Point; Mechanicsburg, Pennsylvania; the Naval Inventory
Control Point, Philadelphia, Pennsylvania; and the Defense Contract
Management Agency, Alexandria, Virginia.

o  	Because of long-standing problems with the accuracy of data in DOD's
inventory management systems, we took a number of measures to assess the
reliability of the Naval Inventory Control Point's data. To assess the
data, we performed electronic testing for obvious errors in accuracy and
completeness in the data on government-furnished material shipped to Navy
repair contractors. When we found discrepancies in the data, such as
missing data elements and data entry errors, we brought them to the Naval
Inventory Control Point officials' attention and worked closely with them
to correct the discrepancies before conducting our analysis. In addition,
we statistically selected a random sample of the Navy's data for review.
This sampling methodology enabled us to independently verify the overall
accuracy of the Navy's data on government-furnished material shipped to
Navy repair contractors.

o  	To identify the number, value, and classification of the
governmentfurnished material shipments, we obtained computerized supply
records from the Navy's transaction history file of all shipments between
October 2001 and September 2002 from the Naval Inventory Control

Appendix I: Scope and Methodology

Point's two office locations-Philadelphia and Mechanicsburg, Pennsylvania.
The records contained descriptive information about each shipment,
including document number, national stock number, quantity shipped,
classification, and source of supply. After some preliminary data
analysis, we excluded all records from the Mechanicsburg office due to the
data set mistakenly capturing nongovernment-furnished material as
government-furnished material.

o  	To select Navy repair contractors and items shipped to them, we used
computerized shipment data obtained from the Naval Inventory Control
Point's transaction history file, including data such as national stock
number, quantity, source of supply, and transaction dates. We randomly
selected 302 unclassified or sensitive shipments (representing 338 items)
and selected the total population of 6 classified shipments (representing
6 items) that were issued to Navy repair contractors in fiscal year 2002
as government-furnished material. We randomly selected and sent surveys to
29 Navy repair contractors (associated with 83 unique repair contracts)
for our review. We received survey responses from 20 of the 29 Navy repair
contractors, representing 207 government-furnished material shipments
(corresponding to 243 items). Four of these Navy repair contractors
received the 6 shipments of classified shipments. Because the number of
Navy repair contractors and government-furnished material shipments were
randomly selected, the results of our analysis can be projected to all
Navy repair contractors and shipments.

o  	To determine how Navy repair contractors are granted access to
government-furnished material (i.e., federal supply class or stock
number), we conducted a modified statistical sample of the various
contractual agreements between the Navy and its repair contractors. We
initially planned to manually review a subset of 40 contracts associated
with our sample shipments to determine how the government-furnished
material was identified in the contract. However, we revised our approach
when we discovered that the Navy's inventory management system had the
functionality to match each of our items by stock number to the associated
Navy repair contracts and contractors that are repairing the items. As a
result, we reviewed all of the contracts associated with our sample
shipments. We found each of our sample shipments was listed by national
item identification number in the contractual repair agreement and based
on certain circumstances (such as items are missing on induction, broken
beyond economical repair, or are needed for the expeditious repair of
another higher assembly item), these items were furnished to the
contractor as government-furnished material.

Appendix I: Scope and Methodology

o  	To determine whether Navy repair contractors had received and
accounted for our selected shipments, we surveyed each randomly selected
contractor to assess whether government-furnished material shipments
delineated in the Naval Inventory Supply Control Point's supply records
had been received and entered into the contractor's property control
records.

o  	To determine what happened to sample shipments that had reportedly not
been received by the Navy repair contractors, we provided a listing to the
Naval Inventory Control Point in Philadelphia for further review. To learn
whether issues associated with unaccounted for shipments were adequately
resolved, we reviewed Department of Defense, Navy, and Naval Inventory
Control Point implementing guidance. Such information provided the basis
for conclusions regarding the adherence to procedures for controlling
shipped inventory.

The Navy repair contractors that responded to our survey were BAE Flight
Systems, Nashua, New Hampshire; Boeing, Jacksonville, Florida; Lockheed
Martin, Marietta, Georgia; Lockheed Martin, Oswego, New York; Lockheed
Martin, Syracuse, New York; Northrop Grumman, Bethpage, New York; Northrop
Grumman, Woodland Hills, California (two locations); Systems and
Electronics, Inc., Sanford, Florida; Raytheon, Indianapolis, Indiana;
Raytheon, Goleta, California; Raytheon, McKinney, Texas; Raytheon
Technical Services Corp., Indianapolis, Indiana; General Dynamics,
Bloomington, Minnesota; Global Technical Systems, Virginia Beach,
Virginia; Sikorsky Aircraft, Shelton, Connecticut; Rockwell Collins, Cedar
Rapids, Iowa; Beaver Aerospace, Livonia, Michigan; L3 Communications,
Alpharetta, Georgia; and Parker Hannifin, Irvine, California.

Our work was performed from March 2003 through April 2004 in accordance
with generally accepted government auditing standards.

Appendix II: Comments from the Department of Defense

Appendix II: Comments from the Department of Defense

Appendix II: Comments from the Department of Defense

Appendix III: GAO Contact and Staff Acknowledgments

GAO Contact William M. Solis, (202) 512-8412

Acknowledgments 	In addition to the contact listed above, Lawson Gist,
Jr., Jacqueline S. McColl, Corrie J. Dodd, Anthony C. Fernandez, Arthur L.
James, Jr., Stanley J. Kostyla, David A. Mayfield, and Robert K. Wild made
key contributions to this report.

Related GAO Products

Defense Inventory: Air Force Needs to Improve Control of Shipments to
Repair Contractors. GAO-02-617. Washington, D.C.: July 1, 2002.

Performance and Accountability Series: Major Management Challenges and
Program Risks-Department of Defense. GAO-01-244. Washington, D.C.: January
1, 2001.

High-Risk Series: An Update. GAO-01-263. Washington, D.C.: January 1,
2001.

Defense Inventory: Plan to Improve Management of Shipped Inventory Should
Be Strengthened. GAO/NSIAD-00-39. Washington, D.C.: February 22, 2000.

Department of the Navy: Breakdown of In-Transit Inventory Process Leaves
It Vulnerable to Fraud. GAO/OSI/NSIAD-00-61. Washington, D.C.: February 2,
2000.

Defense Inventory: Property Being Shipped to Disposal Is Not Properly
Controlled. GAO/NSIAD-99-84. Washington, D.C.: July 1, 1999.

DOD Financial Management: More Reliable Information Key to Assuring
Accountability and Managing Defense Operations More Efficiently.
GAO/T-AIMD/NSIAD-99-145. Washington, D.C.: April 14, 1999.

Defense Inventory: DOD Could Improve Total Asset Visibility Initiative
With Results Act Framework. GAO/NSIAD-99-40. Washington, D.C.: April 12,
1999.

Defense Inventory: Navy Procedures for Controlling In-Transit Items Are
Not Being Followed. GAO/NSIAD-99-61. Washington, D.C.: March 31, 1999.

Performance and Accountability Series: Major Management Challenges and
Program Risks-Department of Defense. GAO/OCG-99-4. Washington, D.C.:
January 1, 1999.

High-Risk Series: An Update. GAO/HR-99-1. Washington, D.C.: January 1,
1999.

Department of Defense: Financial Audits Highlight Continuing Challenges to
Correct Serious Financial Management Problems.

GAO/T-AIMD/NSIAD-98-158. Washington, D.C.: April 16, 1998.

Related GAO Products

Department of Defense: In-Transit Inventory. GAO/NSIAD-98-80R. Washington,
D.C.: February 27, 1998.

Inventory Management: Vulnerability of Sensitive Defense Material to
Theft. GAO/NSIAD-97-175. Washington, D.C.: September 19, 1997.

Defense Inventory Management: Problems, Progress, and Additional Actions
Needed. GAO/T-NSIAD-97-109. Washington, D.C.: March 20, 1997.

High-Risk Series: Defense Inventory Management. GAO/HR-97-5. Washington,
D.C.: February 1, 1997.

High-Risk Series: Defense Financial Management. GAO/HR-97-3. Washington,
D.C.: February 1, 1997.

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