DOD Excess Property: Management Control Breakdowns Result in	 
Substantial Waste and Inefficiency (13-MAY-05, GAO-05-277).	 
                                                                 
Based on limited previous GAO work that identified examples of	 
purchases of new items at the same time identical items in	 
excellent or good condition were excessed, GAO was asked to	 
assess the overall economy and efficiency of the Department of	 
Defense (DOD) program for excess property reutilization (reuse). 
Specifically, GAO was asked to determine (1) whether and to what 
extent the program included waste and inefficiency and (2) root  
causes of any waste and inefficiency. GAO was also asked to	 
provide detailed examples of waste and inefficiency and the	 
related causes. GAO's methodology included an assessment of	 
controls, analysis of DOD excess inventory data, statistical	 
sampling at selected sites, and detailed case studies of many	 
items.								 
-------------------------Indexing Terms------------------------- 
REPORTNUM:   GAO-05-277 					        
    ACCNO:   A24057						        
  TITLE:     DOD Excess Property: Management Control Breakdowns Result
in Substantial Waste and Inefficiency				 
     DATE:   05/13/2005 
  SUBJECT:   Accountability					 
	     Defense cost control				 
	     Defense economic analysis				 
	     Defense procurement				 
	     Federal property					 
	     Federal property management			 
	     Internal controls					 
	     Inventory control					 
	     Inventory control systems				 
	     Program management 				 
	     Property and supply management			 
	     Strategic planning 				 
	     Surplus federal property				 
	     AH-1 Helicopter					 
	     Cobra Helicopter					 
	     DLA Business Systems Modernization 		 
	     DLA Defense Reutilization and Marketing		 
	     Automated Information System			 
                                                                 
	     Huey Helicopter					 
	     Seawolf Attack Submarine				 
	     UH-1 Helicopter					 
	     DRMS Reutilization Modernization Program		 

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GAO-05-277

                 United States Government Accountability Office

                     GAO Report to Congressional Requesters

May 2005

DOD EXCESS PROPERTY

Management Control Breakdowns Result in Substantial Waste and Inefficiency

                                       a

GAO-05-277

[IMG]

May 2005

DOD EXCESS PROPERTY

Management Control Breakdowns Result in Substantial Waste and Inefficiency

                                 What GAO Found

DOD does not have management controls in place to assure that excess
inventory is reutilized to the maximum extent possible. Of $18.6 billion
in excess commodity disposals in fiscal years 2002 and 2003, $2.5 billion
were reported to be in new, unused, and excellent condition. DOD units
reutilized only $295 million (12 percent) of these items. The remaining
$2.2 billion (88 percent) includes significant waste and inefficiency
because new, unused, and excellent condition items were transferred and
donated outside of DOD, sold for pennies on the dollar, or destroyed. DOD
units continued to buy many of these same items. GAO identified at least
$400 million of commodity purchases when identical new, unused, and
excellent condition items were available for reutilization. GAO also
identified hundreds of millions of dollars in reported lost, damaged, or
stolen excess property, including sensitive military technology items,
which contributed to reutilization program waste and inefficiency.
Further, excess property improperly stored outdoors for several months was
damaged by wind, rain, and hurricanes.

Waste and Inefficiency Related to $2.2 Billion in Fiscal Year 2002 and
2003 Disposals of Excess DOD Commodities Reported To Be in New, Unused,
and Excellent Condition

12%	$295 million DOD reutilization

88% $2.2 billion

10%	$248 million DOD special programs ($91 million) Federal agency
transfers ($103 million) Donations to states ($54 million)

25%	$634 million Demilitarization, scrap, and hazardous material disposals

53% $1.3 billion DOD reutilization Public sales Other disposals Source:
GAO analysis.

To illustrate continuing reutilization program waste and inefficiency, GAO
ordered and purchased at little or no cost several new and unused excess
commodities that DOD continued to buy and utilize, including tents, boots,
power supplies, circuit cards, and medical supplies. GAO paid a total of
$1,471, including tax and shipping cost, for these items, which had an
original DOD acquisition cost of $68,127.

Root causes for reutilization program waste and inefficiency included (1)
unreliable excess property inventory data; (2) inadequate oversight and
physical inventory control; and (3) outdated, nonintegrated excess
inventory and supply management systems. Procurement of inventory in
excess of requirements also was a significant contributing factor.
Improved management of DOD's excess property could save taxpayers at least
hundreds of millions of dollars annually.

                 United States Government Accountability Office

Contents

  Letter

Results in Brief
Background
Analysis of Reutilization Program Identifies Billions of Dollars in

Waste and Inefficiency Management Control Breakdowns Resulted in
Reutilization

Program Waste and Inefficiency Conclusions Recommendations for Executive
Action Agency Comments and Our Evaluation

1 4 8

16

34 58 58 60

Appendixes                                                              
                Appendix I:       Objectives, Scope, and Methodology       64 
               Appendix II:    Comments from the Department of Defense     72 
              Appendix III:        Excess Property Condition Codes         80 
              Appendix IV:    Programs Authorized to Receive Excess DOD    82 
                                               Property                    
                                Results of Statistical Tests of Excess     
                Appendix V:              Commodity Inventory               
                                               Accuracy                    84 
              Appendix VI:      GAO Contacts and Staff Acknowledgments     90 

Tables	Table 1: Table 2:

Table 3:

Table 4:

Table 5:

Table 6:

Table 7: Table 8: Table 9:

Defense Reutilization and Marketing Service Revenue 13
Reported Acquisition Value of DOD Excess Commodity
Transfers to Other Programs and Agencies during Fiscal
Years 2002 and 2003 19
Examples of New, Unused Commodity Items Transferred
and Sold Outside of DOD while Still Being Purchased
during Fiscal Years 2002 and 2003 20
Turn-in Transactions with One or More Control Test
Failures at Five DRMOs and Five DLA Supply Depots 36
Estimated Turn-in Transaction Control Test Failures for
Items Classified as Serviceable 41
Reported DRMS Excess Property Losses and
Adjustments 46
DOD Excess Property Condition Codes 80
DOD Special Programs 82
DRMO Turn-in Transactions withOne or More Control Test
Failures 85

                                    Contents

Table 10: DLA Supply Depot Turn-in Transactions with One or More Control
Test Failures 86 Table 11: DRMO Turn-in Transactions That Failed Overall
Control Tests for Condition Code Accuracy 87 Table 12: DRMO Turn-in
Transactions Classified as Serviceable That Failed Control Tests for
Condition Code Accuracy 87 Table 13: DRMO Turn-in Transactions Classified
as Unserviceable That Failed Control Tests for Condition Code Accuracy 88
Table 14: DLA Supply Depot Turn-in Transactions That Failed Overall
Control Tests for Condition Code Accuracy 89

Figures	Figure 1: Figure 2: Figure 3:

Figure 4:

Figure 5:

Figure 6: Figure 7: Figure 8:

Figure 9:

DLA Commodity Acquisition and Distribution Process
DRMS Excess Property Disposal Process
Fiscal Year 2002 and 2003 Disposals of Excess DOD
Commodities in Serviceable and Unserviceable
Condition
Waste and Inefficiency Related to $2.2 billion in Fiscal
Year 2002 and 2003 Disposals of Excess DOD
Commodities Reported To Be in New, Unused, and
Excellent Condition
Examples of Fiscal Year 2002 and 2003 DLA Purchases
When Identical New, Unused Items Were Available for
Reutilization
Medical Instrument Chest Assembled for Maximum
Utilization
One of the New, Unused Excess DOD Circuit Cards
Transferred to GAO in September 2004
New, Unused DOD Power Supply Unit Requisitioned by
GAO in September 2004 from the DLA Depot in Norfolk,
Virginia
New, Unused Excess Cold Weather Boots Purchased in
September 2004

                                     10 14

17

18

24 26 27

28 30 31 32 34 40

Figure 10: New, Unused Excess Shelter Half-Tent Purchased in August 2004

Figure 11: One of the New, Unused Excess DOD Gasoline Burner Units
Purchased in September 2004

Figure 12: Photograph of the New, Unused Portable Suction Apparatus
Purchased in October 2004

Figure 13: New, Unused Excess Level III Biological Safety Cabinet at the
Norfolk DRMO

Contents

Figure 14: Outside Storage of Wood Computer Furniture at the

Huntsville, Alabama, Liquidation Sales Location in July

2004 51 Figure 15: Example of Water-Damaged Items at the DRMS

Liquidation Sales Contractor Location in Huntsville,

Alabama 52 Figure 16: Example of Excess DOD Property Stored Outside at the

DOD Liquidation Sales Contractor Location in Norfolk,

Virginia 53 Figure 17: DOD Excess New, Unused Bandages and Medical

Supplies Purchased over the Internet in October 2004 54 Figure 18:
Existing Nonintegrated DLA Inventory Systems

Environment 57

Abbreviations

BSM Business System Modernization
CAP Civil Aeronautics Patrol
CCLI Commerce Control List Item
C.F.R. Code of Federal Regulations
CONUS Continental United States
CPU Central processing unit
DAISY DRMS Automated Information System
DLA Defense Logistics Agency
DLIS Defense Logistics Information System
DOD Department of Defense
DODAAC DOD Activity Address Code
DODAAD DOD Activity Address Directory
DRMO Defense Reutilization and Marketing Office
DRMS Defense Reutilization and Marketing Service
DSS Defense Standard System
FEDLOG Federal Logistics System
FEDS Federal Disposal System
FSC Federal Supply Class
GSA General Services Administration
GSAXcess GSA Excess Property Web site
HAP Humanitarian Assistance Program
IDEA Interactive Data Extraction and Analysis
JSLIST Joint Service Lightweight Integrated Suit Technology
LEA Law Enforcement Agency

Contents

LSN Local stock number
MIDAS Management Information Distribution and Access System
MILSTRIP Military Standard Requisitioning and Issue Procedures
MARS Military Affiliate Radio System
MLI Military List Item
MWR Morale, welfare, and recreation activities and services
NSN National stock number
OMB Office of Management and Budget
RCP Recycle control point
RIPL Receipt in place location
RMP Reutilization Modernization Program
ROTC Senior Reserve Officer Training Corps
SAMMS Standard Automated Materiel Management System
SCC Supply Condition Code
U.S.C. United States Code

This is a work of the U.S. government and is not subject to copyright
protection in the United States. It may be reproduced and distributed in
its entirety without further permission from GAO. However, because this
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separately.

A

United States Government Accountability Office Washington, D.C. 20548

May 13, 2005

The Honorable Christopher Shays Chairman The Honorable Dennis J. Kucinich
Ranking Minority Member Subcommittee on National Security,

Emerging Threats and International Relations Committee on Government
Reform House of Representatives

The Honorable Susan M. Collins Chairman Committee on Homeland Security

and Governmental Affairs United States Senate

The Honorable Janice D. Schakowsky House of Representatives

This report responds to your request that we assess the overall economy
and efficiency of the Department of Defense (DOD) program for
reutilization (reuse) of excess property. Your request was based on our
limited previous work that identified several examples of problems in this
area. Specifically, our November 2003 report1 identified several examples
that showed that at the same time DOD excessed biological equipment items
in good or excellent condition and sold many of them to the public for
pennies on the dollar, it was purchasing the same or similar items. In
addition, at a June 2002 hearing on ineffective and inefficient DOD
business processes before the Subcommittee on National Security, Veterans
Affairs and International Relations, House Committee on Government Reform,
we testified2 that the lack of asset visibility over the Joint Service
Lightweight

1 GAO, DOD Excess Property: Risk Assessment Needed on Public Sales of
Equipment That Could Be Used to Make Biological Agents, GAO-04-15NI
(Washington, D.C.: Nov. 19, 2003).

2 GAO, DOD Management: Examples of Inefficient and Ineffective Business
Processes, GAO-02-873T (Washington, D.C.: June 25, 2002).

Integrated Suit Technology (JSLIST)3 resulted in DOD units sending JSLIST
to Defense Reutilization and Marketing Offices (DRMO) as excess. DRMOs
then issued coats and trousers to other federal agencies, scrapped some of
these items, and sent other JSLIST to a government liquidation contractor,
while at the same time procuring hundreds of thousands of new garments in
response to the terrorist attacks of September 11, 2001. You were
concerned that our limited examples could indicate systemic problems.

Accordingly, you asked us to assess the overall economy and efficiency of
DOD's excess property reutilization program. To do so, we reviewed
applicable laws and regulations; DOD policies and procedures; and current
systems, processes, and management controls. Where we found controls to be
ineffective, we tested and evaluated them further. You asked us to report
(1) whether and to what extent we found waste and inefficiency and (2) the
root causes of any waste and inefficiency. In reporting on the results of
our work, you asked us to provide detailed examples of any waste and
inefficiency and the related causes. As agreed with your offices, our
audit focused on identifying new, unused, and excellent condition excess
commodity inventory4 activity during fiscal years 2002 and 20035 and
determining whether the Defense Logistics Agency (DLA) purchased identical
items instead of reutilizing the available excess items in Defense
Reutilization and Marketing Service (DRMS) inventory.

To identify potential waste and inefficiencies, we analyzed the universe
of recorded fiscal year 2002 and 2003 transactions on excess DOD commodity
turn-ins and disposals and DLA commodity purchases. We compared DOD
reutilization of excess new, unused, and excellent condition commodities
to transfers, donations, public sales, and destruction of excess

3 JSLIST is a universal, lightweight, two-piece garment (coat and
trousers) that when combined with footwear, gloves, and a protective mask
and a breathing device, forms the warfighter's protective ensemble.
Together, the ensemble is to provide maximum protection to the warfighter
against chemical and biological contaminants without negatively affecting
the ability to perform mission tasks. JSLIST is the current model
protective suit used by the military services.

4 DOD commodities within the scope of this report include a wide variety
of equipment, spare parts, and supplies, such as office and laboratory
equipment, aircraft parts and weapons system components, construction and
medical supplies and equipment, and clothing and textile items. Ammunition
and explosive weapons, fuel, subsistence items, and pharmaceuticals are
not included in the scope of this report.

5 Fiscal year 2002 and 2003 data were the most recent data available at
the time we initiated our audit.

commodities. We also compared DOD commodity purchases to identical excess
items in new, unused, and excellent condition to determine whether DOD
made unnecessary purchases instead of reutilizing available excess items.
To determine the causes of identified waste and inefficiency, we tested
and evaluated controls for assuring the reliability of data and
information used for reutilization decision making and safeguarding excess
property. We also assessed the effectiveness of current and planned supply
and excess inventory management systems and processes for reutilization of
excess property.

You also asked us to illustrate the details of our analysis of fiscal year
2002 and 2003 waste and inefficiency by identifying specific examples and
performing case study investigations of the details of these examples. In
addition, you asked us to purchase and requisition, as case studies,
selected excess items that DLA was continuing to purchase, the military
services were continuing to utilize, or both.

To assure ourselves that DOD data were sufficiently reliable for the
purpose of our audit, we compared database totals to information in
official agency reports, electronically checked control totals and the
completeness of key data elements, and statistically tested the accuracy
of excess inventory data that are key to the excess property reutilization
program. We conducted our work from November 2003 through February 2005 in
accordance with U.S. generally accepted government auditing standards. We
performed our investigative work in accordance with standards prescribed
by the President's Council on Integrity and Efficiency. A detailed
discussion of our objectives, scope, and methodology is presented in
appendix I. We requested comments on a draft of this report from the
Secretary of Defense or his designee. Written comments from the Acting
Under Secretary of Defense for Logistics and Materiel Readiness are
reprinted in appendix II.

Results in Brief 	DOD does not have effective management processes,
systems, and controls in place to assure that it is reutilizing excess
inventory to the maximum extent possible and safeguarding excess items
from damage, loss, and theft, as required by federal regulations, DOD
policy, and GAO internal control standards.6 As a result, we found
substantial waste and inefficiency related to DOD's excess property
reutilization program. Of the $18.6 billion in reported fiscal year 2002
and 2003 excess commodity disposals, $2.5 billion related to items in new,
unused, and excellent condition (A condition).7 Of the $2.5 billion, we
determined that $2.2 billion included substantial waste and inefficiency
because new, unused, and excellent condition items were being transferred
or donated outside of DOD, sold on the Internet for pennies on the dollar,
or destroyed rather than being reutilized. We also found that DOD
purchased at least $400 million of identical commodities instead of
reutilizing available A-condition excess items. However, the extent of
this problem may be greater due to incomplete and inaccurate data that are
key to identifying excess items for reutilization. DRMS also reported $466
million in excess property losses from fiscal years 2002 through 2004,
such as missing, damaged, and stolen property, adding to reutilization
program waste.

To illustrate continuing reutilization program waste and inefficiencies,
during fiscal year 2004 and the first quarter of fiscal year 2005, we
obtained several new and unused excess DOD commodity items that were being
purchased by DLA, were in use by the military services, at the time we
obtained them, or both, including the following.

o 	We requisitioned at no charge a medical instrument chest, two power
supplies, and two circuit cards. Although these items had an original DOD
acquisition cost of $55,817, we paid only about $5 shipping cost to obtain
them.

o 	We also purchased at minimal cost, over the Internet at
govliquidation.com, tents, boots, gasoline burners (stove/heating units),

6 Federal Property Management Regulations, 41 C.F.R. ch. 101 (2004) and
the Federal Management Regulation, 41 C.F.R. ch. 102 (2004), issued by the
General Services Administration; DOD 4160.21-M, Defense Materiel
Disposition Manual; and GAO, Standards for Internal Control in the Federal
Government, GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).

7 DOD excess property condition codes are defined in appendix III.

a medical suction apparatus, and bandages and other medical supply items.
Although the total reported acquisition cost for these items was $12,310,
we paid a total of $1,466 to obtain them, about 12 cents on the dollar,
including buyer's premium, tax, and shipping cost.

The root causes for the billions of dollars in waste and inefficiency
related to management control breakdowns across DOD, including weaknesses
in DOD's excess property reutilization program, stemmed from (1)
unreliable excess property inventory data; (2) inadequate oversight,
accountability, and physical control of excess property; and (3)
inadequate processes and outdated, nonintegrated inventory systems that do
not provide adequate visibility of excess property available for
reutilization at the time military units order and purchase commodity
items. In addition, as we have reported for many years,8 long-standing DOD
logistics management weaknesses that resulted in purchases in excess of
actual requirements also resulted in the disposal of unused items due to
obsolescence and contributed indirectly to reutilization program waste and
inefficiency.

Our statistical tests of controls for accuracy of excess commodity
inventory and our case studies and interviews led us to conclude that
unreliable data are a key cause of the ineffective excess property
reutilization program. DRMS policy9 requires DRMO personnel to verify
turn-in information, including item descriptions, quantities, condition
code, and demilitarization code at the time excess property is received.
However, we found that DRMS management did not enforce these verification
requirements. Our statistical tests at 5 of 93 DRMO locations estimated
error rates that ranged from 8 percent at 1 DRMO to 47 percent at another
DRMO, indicating ineffective controls for assuring the accuracy of excess
inventory data at these locations.10 Although condition code accuracy is
key to reutilization program effectiveness, our estimate of

8 GAO, Defense Inventory: Analysis of Consumption of Inventory Exceeding
Current Operating Requirements Since September 30, 2001, GAO-04-689
(Washington, D.C.: Aug. 2, 2004), and Major Management Challenges and
Program Risks: Department of Defense, GAO-03-98 (Washington, D.C.: January
2003).

9 DRMS-I 4160.14, vol. II, Instructions for Warehousing for DRMS and the
Defense Reutilization and Marketing Offices, ch. 2, "Receipt and Storage,"
S: 1 (A), (B) (April 2002).

10 DRMS fiscal year 2004 operational compliance reviews of 91 DRMOs
reported unacceptable or inadequate ratings for 20 DRMOs and fair ratings
for 23 DRMOs. The remaining 48 DRMOs had ratings of good or excellent,
including 2 of the 5 DRMOs that we tested.

condition code error rates for the 5 DRMOs we tested ranged from 5 percent
at 1 DRMO to 22 percent at 2 other DRMOs. Most of the condition coding
errors related to items reported to be in unserviceable condition when the
items were actually in serviceable condition, which could prevent items in
new, unused, and excellent condition from being selected for
reutilization. Estimated error rates at 5 of the 25 DLA supply depots that
we tested ranged from 6 percent to 16 percent. However, we did not find
condition code errors at these supply depots.

In addition, we found weaknesses in oversight and accountability that
resulted in lost, stolen, and damaged excess property and contributed to
hundreds of millions of dollars in overall reutilization program waste and
inefficiency. Regardless of whether sensitive technology items are new or
used, DOD policy11 requires that they be restricted to use by authorized
parties or destroyed when no longer needed by DOD. For fiscal years 2002
through 2004, DRMS reported a total of $466 million in known excess
property losses, including lost, stolen, and damaged property and
unverified adjustments. Losses reported by DRMOs included nearly 150
chemical and biological protective suits, over 70 units of body armor, and
5 guided missile warheads.12 Losses reported by DLA supply depots included
thousands of sensitive military items, such as weapons system components
and aircraft parts. Because 43 percent of the reported losses involved
military and commercial technology that required demilitarization control,
these weaknesses also reflect security risks. Further, inadequate DRMS
oversight and accountability for contractor and DRMO operations have
resulted in millions of dollars in damage to excess property that had been
improperly stored outside for several months during fiscal year 2004 and
subjected to wind, rain, and hurricanes.

11 DOD 4160.21-M-1, Defense Demilitarization Manual, ch. 1.

12 The missing chemical and biological protective suits are not the
current JSLIST suit technology, and the missing body armor is not the
ceramic technology currently in use by deployed troops.

Inefficient, nonintegrated excess inventory and supply management systems
lack controls necessary to prevent waste and inefficiency in the
reutilization program. For example, because the DRMS excess inventory
system and the DLA supply management system are outdated and
nonintegrated, they do not share information necessary to (1) identify and
alert DLA item managers of excess property that is available to fill
supply orders and (2) prevent purchases of new items when A-condition
excess items are available for reutilization. DLA has acknowledged serious
deficiencies in its automated inventory management systems and has efforts
under way to replace its supply management system, and DRMS has an effort
under way to upgrade its excess inventory system. However, we found that
these efforts had not been effectively coordinated, and they did not
adequately address identified process deficiencies, such as the failure to
record national stock numbers (NSN)13 for commodity purchases and
inventory records and unreliable condition code data.

This report contains 13 recommendations to help improve the overall
economy and efficiency of DOD's reutilization program for excess
commodities, including recommendations for better coordination between
DRMS, DLA, and the military services with regard to data reliability;
strengthened DRMS management oversight, accountability, and physical
inventory control; and improvements in the functional design for excess
property reutilization in DLA's future commodity inventory systems
environment. In its April 15, 2005, letter commenting on our report, DOD
concurred with 8 recommendations. For the 5 recommendations with which DOD
partially concurred, we view DOD's actions to be generally responsive to
the intent of our recommendations. DOD's comment letter is reprinted in
appendix II.

13 An NSN is a unique13-digit number that identifies standard use
inventory items.

Background	DLA is DOD's combat support agency under the supervision,
direction, authority, and control of the Under Secretary of Defense for
Acquisition, Technology, and Logistics. DLA's mission is to provide
best-value logistics support to America's armed forces, in peace and in
war, around the clock, and around the world. In carrying out its mission,
DLA manages inventory valued at about $83 billion, consisting of more than
5 million consumable (expendable) items, including commodities such as
fuel, food, clothing and other textiles, medical supplies, industrial use
items, and spare and repair parts supporting over 1,400 weapon systems.
DLA also buys and distributes hardware and electronic items that are used
in maintenance and repair of equipment and weapons systems. In fiscal
years 2002 and 2003, DLA expenditures related to sales and services
amounted to over $46.5 billion, including about $36 billion for commodity
purchases and about $600 million for DRMS excess property disposal
services. DLA and DRMS operate under the Defense-wide Working Capital
Fund.14 DLA is financed through user charges to cover costs, and DRMS is
financed through user charges and excess property and scrap sale proceeds.
DLA activities related to this report fall into two main areas: (1)
commodity acquisition and management and (2) excess property disposals by
DRMS and DLAmanaged supply distribution depots (referred to as DLA supply
depots).

    DLA Commodity Acquisition and Management Process

DLA commodity acquisition and management functions discussed in this
report are carried out by three Defense supply centers, which are located
in Columbus, Ohio; Richmond, Virginia; and Philadelphia, Pennsylvania. The
DLA acquisition process focuses on (1) the acquisition of inventory
requisitioned by customers for immediate use and (2) routine inventory
replenishment. Defense Supply Center item managers initiate commodity
procurements based on military unit requirements for materiel and supplies
and military unit requisitions (supply orders). Supply center item
managers consolidate the requirements and work with buyers to procure
requested items. Items for which there are immediate needs are delivered
directly to a military unit by the commercial vendor, and items needed to
support anticipated operations (referred to as the requirements objective)
are stored at DLA supply depots for later issue. The DLA Defense
Distribution Center uses a total of 26 DLA supply depots located
throughout the United States and Europe, as well as in Guam and Kuwait,

14 The Defense-wide Working Capital Fund is a revolving fund that the
Secretary of Defense has established under authority of 10 U.S.C. S: 2208.

to store commodities and other items that are classified by over 5 million
different NSNs. This inventory includes commodities, such as clothing and
other textiles; electronics; industrial, general, and construction
supplies; subsistence items; and medical supplies and equipment. Figure 1
illustrates the DLA commodity acquisition and distribution process.

inventory and service-level inventory to locate available items to fill an
order.

    Excess Property Disposal Process

The Federal Property and Administrative Services Act of 1949, as
amended,15 places responsibility for the disposition of surplus government
real and personal property with the General Services Administration (GSA),
which has delegated responsibility for disposal of DOD property to the
Secretary of Defense. In accordance with federal regulations governing
property management16 and department policy in DOD 4160.21-M, Defense
Materiel Disposition Manual, DOD agencies and military services are
responsible for determining whether property they hold is considered
excess. Federal regulations17 also require executive agencies to ensure
that personal property not needed by their activity is offered for use
elsewhere within the agency. In accordance with federal regulations, DOD
4160.21-M, chapter 5, calls for reutilization of excess property to the
extent feasible to fill existing needs and to satisfy additional needs
before initiating new procurement or repair. All DOD activities are
required to screen available excess assets to identify items that could
satisfy valid needs, and the military services have programs for
reutilizing property by redistributing excess property across their units
to meet ongoing operational needs. DLA has overall responsibility for
property that is excess to military and DOD units. DLA has placed
responsibility for excess property disposals with DRMS.

15 40 U.S.C. S: 541.

16 Federal Property Management Regulations, 41 C.F.R. ch. 101 (2004) and
the Federal Management Regulation, 41 C.F.R. ch. 102 (2004), issued by
GSA.

17 Federal Management Regulation, 41 C.F.R. ch. 102 (2004).

When a military service or DOD agency has property that it no longer
needs, it turns the property over to a DRMS field warehouse location-or
reutilization facility-referred to as a DRMO. During fiscal year 2004,
DRMS managed 93 DRMOs, including 39 central DRMOs, 54 satellite DRMOs, and
35 receipt in place locations referred to as RIPLs. Reported excess
property turn-ins are entered into the DRMS Automated Information System
(DAISY). DRMS then posts descriptive information about the excess property
to a Web page that lists property that is available for reutilization by
DOD units and specially designated programs, transfer to federal agencies,
and donation to states. DRMS has two organizational elements that manage
and oversee excess property disposals. DRMS National is responsible for
daily operations inside the continental United States. DRMS International
is responsible for daily DRMS activities located outside the continental
United States. DRMS International has field offices in Belgium, Germany,
Guam, Hawaii, Italy, Japan, Korea, Portugal, Spain, Thailand, Turkey, the
United Arab Emirates, and the United Kingdom, and it supports the task
force in the Balkans.

During fiscal years 2002 and 2003, the military services, DLA supply
depots, and DOD agencies turned in18 excess commodities with a reported
acquisition value of approximately $31 billion and disposed of excess
property valued at $18.6 billion. This property included everything from
office equipment, medical supplies, and clothing to scrap from naval
ships, military equipment, and hazardous materials. The condition of the
property ranges from being well-used or damaged property that has little
value to new, unused items that sometimes are still in the original
manufacturer's packaging.

DRMS bills DOD units and other federal agencies for disposal services
based on turn-in volume. DRMS bills the military services and other DOD
agencies a prorated amount for disposal costs net of scrap and liquidation
sale proceeds. Table 1 shows DRMS's reported revenue for excess property
disposal services, including billings to the military services.19

18 A turn-in consists of an item or group of items recorded on the same
disposal turn-in document. Each disposal turn-in document represents one
DRMS receipt.

19 Disposal costs net of scrap and liquidation sale proceeds are prorated
to the military services and other DOD units.

          Table1: Defense Reutilization and Marketing Service Revenue

Dollars in millions

Fiscal year Fiscal year Fiscal year Source 2002 2003 2004

        DOD unit billings for turn-in transactions $250.5 $223.2 $208.7

DOD unit billings for hazardous waste
disposal 54.7 56.1 54.0

Billings for other fund activities 7.6 7.7

                         Total DOD $312.8 $287.0 $266.7

Other billings: Other federal agencies $0.7 $0.7 $0.7 Foreign military
sales 3.0 3.0

                           Total other $3.7 $3.7 $3.7

          Scrap and liquidation sales proceeds, net $39.7 $51.7 $38.1

                    Total DRMS revenue $356.2 $342.4 $308.5

Source: President's Fiscal Year 2005 Budget Submission.

Turn-ins of excess property are reported on DOD Form 1348, Disposal
Turn-in Document, using a hard copy form that accompanies physical turnins
of property at DRMOs or electronic reporting. In accordance with DOD
4160.21-M, Materiel Disposition Manual, upon arrival at a DRMO, excess
items are to be inspected and the item descriptions, quantities, condition
codes, and demilitarization codes are to be verified. Based on the item
type and condition, a decision is made as to whether the item should be
made available for reutilization. For excess property in new, usable, or
repairable condition, redistribution from one DOD unit to another allows
the government to make full use of its resources, avoids unnecessary
procurement of property, and results in economy and efficiency of
operations. Transfers and donations of excess DOD property to special
programs, federal agencies, and states help to conserve their budgetary
resources. Unusable items are generally sold as scrap.

Department policy in DOD 4160.21-M-1, Defense Demilitarization Manual,
calls for identifying and controlling items that have a significant
military or commercial technology application to prevent improper use or
release of these items outside of DOD. DOD's Demilitarization Manual
establishes specific codes that are designed to indicate whether DOD
property is available for reuse without restriction or whether specific
restrictions apply, such as removal of classified components, destruction
of sensitive military technology, or trade security control. Any residual

excess property that is not reused, transferred, or donated may be sold as
scrap or sent to a landfill or other appropriate site for final disposal.
Figure 2 illustrates the excess property turn-in and disposal process.

Figure2: DRMS Excess Property Disposal Process

Source: GAO.

Excess DOD property is available for reutilization, transfer, and donation
during a 49-day screening period following turn-in to DRMS. It may take up
to a week to record excess property receipts into DRMO inventory. Once
excess property receipts are recorded, DOD units and specially designated
programs may screen for and select items for reutilization. Special

programs consist of entities that directly support DOD's mission,
customers that have statutory authorization to receive excess DOD
property, and customers that have been specially designated by DOD to
receive excess property items. Special programs share screening priority
with DOD, and DRMS accounts for special program requisitions of DOD excess
property as DOD reutilization. A description of the special programs is
included in appendix IV.

If excess property is still available after the DOD and special program
screening period (the end of the first 21 days), the property is made
available for transfer to other federal agencies through the GSA Federal
Disposal System (FEDS) Web site known as GSAXcess for a 21-day period.
Excess DOD property is available to DOD agencies during the GSA federal
agency screening phase. DOD entities and others can specify their excess
property needs on a "want list" and DAISY and GSA FEDS will send notices
when such property becomes available. Property that is not reutilized by
DOD or transferred to federal agencies after 42 days is considered surplus
to the federal government and can be donated to state and local
governments and other qualified organizations, or if not donated, it can
be sold to the public after the 49-day screening period has expired.
Government Liquidation, LLC is the DRMS commercial venture partner
(contractor) for liquidation sales of excess property. Excess property at
DRMOs is transferred to a liquidation contract sales site co-located with
a DRMO. DLA supply depot excess property to be sold to the public is sent
to one of two national liquidation sales locations. DLA supply depots
located west of the Mississippi ship their excess property to the
Huntsville, Alabama, liquidation sales location, and DLA supply depots
located east of the Mississippi ship their excess property to the Norfolk,
Virginia, liquidation sales location. Overseas, DRMOs sell excess property
directly to the public.

  Analysis of Reutilization Program Identifies Billions of Dollars in Waste and
  Inefficiency

Our analysis of $18.6 billion20 in fiscal year 2002 and 2003 excess
commodity disposal activity identified $2.5 billion in excess items that
were reported to be in new, unused, and excellent condition (A condition).
Although federal regulations and DOD policy require reutilization of
excess property in good condition, to the extent possible, our analysis
showed that DOD units only reutilized $295 million (12 percent) of these
items. The remaining $2.2 billion (88 percent) of the $2.5 billion in
disposals of Acondition excess commodities were not reutilized, but
instead were transferred, donated, sold, or destroyed. About $1.6 billion
of the $2.2 billion was transferred to other federal agencies and special
programs, donated to states, or sold to the public for pennies on the
dollar. DRMS sent the remaining $634 million to scrap and other
contractors for disposal. We also found that DOD purchased at least $400
million of identical items during fiscal years 2002 and 2003, instead of
reutilizing available excess items in A condition. However, our analysis
of transaction data and our tests of controls for inventory accuracy
indicate that the magnitude of waste and inefficiency could be much
greater due to military units improperly downgrading condition codes of
excess items that are in new, unused, and excellent condition to
unserviceable and the failure to consistently record NSNs21 needed to
identify like items. To illustrate continuing reutilization program
inefficiencies and wasteful purchases, during fiscal year 2004 and the
first quarter of fiscal year 2005, we obtained several new and unused
excess DOD commodity items that were being purchased by DLA, were
currently in use by the military services, or both.

    Excess Commodity Items Reported To Be in Unserviceable Condition Accounted
    for Most of the Disposal Activity

DRMS is responsible for disposing of unusable items, often referred to as
"junk," as well as facilitating the reutilization of usable items. As
shown in figure 3, our analysis of DRMS data showed that $15.6 billion of
the $18.6 billion in fiscal year 2002 and 2003 excess DOD commodity
disposals consisted of items reported to be in unserviceable condition,
including items needing repair, items that were obsolete, and items that
were downgraded to scrap. The remaining $3 billion in excess commodity
disposals consisted of items reported to be in serviceable condition,

20 The reported acquisition value at the time the items were turned in as
excess.

21 An NSN is a 13-digit number that identifies standard use inventory
items. The first 4 digits of the NSN represent the Federal Supply
Classification, such as 8430 for men's footwear, followed by a 2-digit
NATO code and a 7-digit designation for a specific item, such as a cold
weather boot.

including $2.5 billion in excess commodities reported to be in A condition
(new, unused, and excellent condition).

Figure3: Fiscal Year 2002 and 2003 Disposals of Excess DOD Commodities in
Serviceable and Unserviceable Condition

16% $3 billion

13%	$2.5 billion A-condition commodities

3%	$544 million Other serviceable commodities

84%	$15.6 billion Unserviceable condition

Other serviceable

Unserviceable

Source: GAO analysis.

Although DOD units reported that $15.6 billion (84 percent) of the excess
commodities disposed of during fiscal years 2002 and 2003 were in
unserviceable condition, DRMS data showed that DOD units had reutilized
over $1.4 billion of these items-an indication that the items were, in
fact, serviceable. Erroneous reporting of serviceable excess items as
unserviceable hinders efforts at effective reutilization and can result in
lower sales proceeds for items sold to the public. Although we do not know
the extent of this problem, as discussed later, our statistical tests of
DRMO inventory at five locations identified significant errors related to
excess items that were coded as unserviceable when they were in fact in
new, unused, and excellent condition.

    DRMS Gave Away, Destroyed, or Sold Excess Commodities Reported To Be in New
    and Excellent Condition

Our analysis of a reported $2.5 billion22 in fiscal years 2002 and 2003
disposal activity related to excess commodities reported to be in A
condition showed that DOD units reutilized only $295 million of these
items. As shown in figure 4, the remaining $2.2 billion (88 percent) were
not reutilized, but instead were transferred to special programs and other
federal agencies, donated to states, sold to the public, or destroyed
through demilitarization and scrap contracts. As noted previously, DOD
policy calls for the reutilization of excess property to the extent
feasible and permits the disposal of unneeded items.23 However, the
disposal of $2.2 billion in excess new, unused, and excellent condition
items indicates that DOD bought more items than it needed.

Figure4: Waste and Inefficiency Related to $2.2 billion in Fiscal Year
2002 and 2003 Disposals of Excess DOD Commodities Reported To Be in
New,Unused, and Excellent Condition

12%	$295 million DOD reutilization

88% $2.2 billion

10%	$248 million DOD special programs ($91 million) Federal agency
transfers ($103 million) Donations to states ($54 million)

25%	$634 million Demilitarization, scrap, and hazardous material disposals

53%	$1.3 billion Public sales

DOD reutilization Other disposals Source: GAO analysis.

22 Reported acquisition value.

23 DOD 4160.21-M, Defense Materiel Disposition Manual, ch. 5,
"Reutilization/Transfer Screening and Issue," S: A.

Transfers and Donations Outside As shown in table 2, during fiscal years
2002 and 2003, DOD transfers of A

of DOD	condition excess property valued at about $248 million benefited
international governments; state and local governments; other federal
agency programs; and specially designated programs such as DOD's
Humanitarian Assistance Program, foreign military assistance programs, and
law enforcement agencies.

Table2: Reported Acquisition Value of DODExcess Commodity Transfers to
Other Programs and Agencies during Fiscal Years 2002 and 2003

                              Dollars in millions

                                 Program/agency

Acquisition value of excess DOD commodities provided to others

                                 International

U.S. Agency for International Development and
sponsored foreign assistance programs $5

Department of State and sponsored foreign assistance programs

DOD-sponsored Humanitarian Assistance Program

Foreign military assistance programs

                   Total, international $121 State and local

                               State offices $54

Law enforcement agencies

                           Total, state and local $78

                               Total, federal $49

                                   Total $248

Source: GAO analysis of DOD data.

Our overall analysis identified disposals of over 22 million new, unused,
and excellent condition excess commodity items that were identical to
items that DLA continued to purchase, stock, or both, resulting in waste
of DOD resources. We investigated the details of more than a dozen of
these disposal transactions. Table 3 highlights three examples from our
case studies that illustrate waste related to excess commodities in new,
unused, and excellent condition that were transferred or donated outside
DOD at the same time DLA purchased identical items.

Table3: Examples of New, Unused Commodity Items Transferred and Sold
Outside of DOD while Still Being Purchased during Fiscal Years 2002 and
2003

                   Example #1 -    Example #2 - Medical  
                   Extreme cold    instrument            
      Action      weather boots           chests          Example #3 - Large  
                                                                tents         
Turn-in unit Army's 35th Supply     U.S. Army Medical  Army National Guard 
                and Services          Material Agency in         unit at Camp 
                   Battalion in       Sagami, Japan.         Beauregard,      
                  Sagami, Japan.                              Louisiana.      
Turn-in date      4/23/03             02/05/02              2/06/02        
                172 pairs of new,  132 new, unused       7 large excess tents 
Excess item  unused extreme     medical instrument       (18 X 52 ft.)     
                cold weather boots  chests in original    valued at $15,963.  
                    valued at         boxes valued at    
                $23,220 ($135 per        $67,647.        
                      pair).                             

                  7/30/03 - 172    02/08/02 - all 132     2/14/02 - one tent  
Disposition of pairs of boots   medical chests           transferred to    
                  were                                   
    excess items    sold to the    were requisitioned by    Federal Bureau of 
                  Robinson Trading          the           Prisons and used to 
                  Company for $69  Humanitarian           cover recyclables.  
                  (about 40 cents  Assistance Program.   
                     per pair).                          
                                                         2/20/2002 - 6 tents  
                                                            transferred to    
                                                          Maricopa Sheriff's  
                                                             Department,      
                                                         Arizona, for use as  
                                                         field command        
                                                                posts.        

Subsequent From 5/15 through 7/30/03 - 8 From 2/08 through 5/03/02 - 15
From 2/15 through 5/18/02 - 4

purchase military units purchased 214 pairs of military units purchased 97
identical military units purchased 34 identical identical boots from DLA.
DLA medical instrument chests from DLA. tents from DLA. DLA continued to
continued to purchase these boots. DLA continued to purchase these
purchase these tents. items.

Wastea	Reutilization of 172 pairs of boots Reutilization of the 132
medical Reutilization of the 7 tents would have would have saved military
units chests would have saved military saved military units $18,613.
$27,678. units $88,415.

Source: GAO analysis.

aWaste includes surcharges, which are the additional amount added to the
price of an item to recover DLA's cost of purchasing and selling supplies
to DOD customers as well as the cost of accounting, cataloging, storage,
handling, and shipping. Surcharges are based on a weighted average cost
for warehousing and shipping supply items. The average cost recovery rate
for all items was 21.5 percent in fiscal year 2002 and 20.7 percent in
fiscal year 2003.

DRMS Destroyed Hundreds of In addition to instances where DOD units failed
to reutilize excess Millions of Dollars of Excess commodities in A
condition that were instead given away to other entities,

Commodities in New and Excellent Condition

we identified instances where DRMS destroyed these items. DRMS destroys or
scraps items that are not reutilized or sold. As illustrated in figure 4,
during fiscal years 2002 and 2003, DRMS destroyed, scrapped, or used
hazardous materials contractors to dispose of excess commodities valued at
about $634 million-about 25 percent of the $2.5 billion reported
acquisition value for disposals of excess commodities in new, unused, and
excellent condition. The majority of these items-items valued at $473
million-were military technology items, such as circuit cards, power

supplies, and aircraft parts, that are required to be destroyed or
demilitarized pursuant to national security guidelines when they are no
longer needed by DOD. Some of the destroyed items had remained in supply
inventory for many years and had become obsolete. However, we found
several instances where items that were destroyed were still being
purchased, used, or both by military units. The following examples
illustrate the types of A-condition excess items that were destroyed.

Destruction of excess items that required demilitarization.

Examples of excess A-condition items that were destroyed pursuant to
demilitarization requirements included

o 	2,390 aircraft parts valued at $9,119,876, such as rotary wing blades,
rotary rudders, windshield panels, fuel tanks, and pilot protection armor;

o 	34,070 circuit cards valued at $73,666,720, including 88 circuit cards
related to one NSN valued at $265,565;

o  1,604 radio sets valued at $10,247,110;

o  477 power supply units valued at $3,385,580; and

o  3 plasma display units valued at $263,151.

Our case study investigations showed instances where power supplies and
circuit cards that were still being purchased by DLA, stocked and issued
to military units, or both were sent to a DRMO rather than being returned
to supply inventory. For example, we found that the Army's Tank-Automotive
and Armament Command turned in 14 excess circuit card assemblies valued at
$7,806 on May 29, 2003, because the Army had directed the retirement of
its AH-1 Cobra and UH-1 Huey helicopters. However, the Navy and some
foreign countries have continued to use these helicopters. The circuit
cards are used in the M136 Helmet Sight, a heads-up display, on the Cobra
Helicopter. The heads-up display permits a pilot to aim the helicopter's
rockets and the fixed forward firing gun. The circuit cards were
advertised for reutilization to DOD and foreign military sales customers.
Because they were not selected for reutilization within the 49day
screening period, they were sent to a demilitarization contractor on June
8, 2004, for destruction by thermal reduction.

Destruction of excess A-condition commodity items as scrap. DRMS also
scrapped excess A-condition commodities valued at about $144 million
during fiscal years 2002 and 2003 that did not require demilitarization.
Normally, these items are transferred, donated, or sold if they are not
selected for reutilization within DOD. However, items that are not
selected for reutilization or transferred, donated, or sold are scrapped.
For example, DRMS scrapped excess new and unused items, such as the
following:

o  340 computers with a reported acquisition value of $2,929,539,

o  2,440 bunk beds valued at $341,600,

o  29 simulators valued at $1,995,500,

o  567 power supplies valued at $1,683,211, and

o  29 teleprinters valued at $901,099.

Public Sales of New and Unused As noted in figure 4, 53 percent, or $1.3
billion of the total $2.5 billion in

Excess DOD Commodity Items 	fiscal year 2002 and 2003 A-condition excess
commodity turn-ins, was sold to the public. Although liquidation sales of
excess commodities are an appropriate method of disposal when items cannot
be reutilized, liquidation sales of items that are in new, unused, and
excellent condition that could have been reutilized represent significant
waste and inefficiency. Our case study investigations of fiscal year 2002
and 2003 disposals of excess A-condition commodities found that DRMS sold
numerous excess items at the same time DLA purchased identical items. Our
analysis showed that DRMS received a total of about $48 million in fiscal
year 2002 and 2003 liquidation sales revenue for property valued at $1.3
billion-an average of about 4 cents on the dollar. Liquidation contractor
officials told us that about 80 percent of their revenue relates to the
sale of items in good condition.

Unnecessary Commodity Our analysis of fiscal year 2002 and 2003 DLA
commodity purchases and

Purchases 	DRMS excess property inventory data identified numerous
instances in which the military services ordered and purchased items from
DLA at the same time identical items-items with the same NSN-that were
reported to be in new, unused, and excellent condition were available for
reutilization. We found that DOD purchased at least $400 million of
identical items during fiscal years 2002 and 2003 instead of using
available

excess A-condition items. The magnitude of unnecessary purchases could be
much greater because NSNs needed to identify identical items were not
recorded for all purchase and turn-in transactions. For example, we
determined that DLA buyers and item managers did not record NSNs for 87
percent (about $4.9 billion) of the nearly $5.7 billion in medical
commodity purchases by military units during fiscal years 2002 and 2003.
Further, as discussed later in this report, improper downgrading of
condition codes to unserviceable could also result in an understatement of
the magnitude of unnecessary purchases. While our statistical tests found
a few instances of inaccurate serviceable condition codes, most condition
code errors related to the improper downgrading of condition to
unserviceable. Figure 5 shows examples from our analysis of A-condition
excess items that were available for reutilization at the time DLA
purchased identical items.

Figure5: Examples of Fiscal Year 2002 and 2003 DLA Purchases When
Identical New,Unused Items Were Available for Reutilization

                             Source: GAO analysis.

aAlthough DLA continues to use the term "construction," this commodity
group consists primarily of land and maritime weapons system components.
According to a DLA official, the category label will be updated when data
are eventually migrated to the new Business Systems Modernization.

    Fiscal Year 2004 and 2005 Requisitions and Purchases Demonstrate Continuing
    Waste and Inefficiency

Case Study Requisitions of New and Unused DOD Commodities

To determine whether the problems identified in our analysis of fiscal
year 2002 and 2003 data were a continuing problem, we monitored DRMS
commodity disposal activity in fiscal year 2004 and the first quarter of
fiscal year 2005. We found that DOD continued to transfer, donate, and
sell excess A-condition items instead of reutilizing them. To illustrate
these problems we requisitioned several excess new and unused items at no
cost and purchased other new and unused commodities at minimal cost. We
based our case study selections on new, unused items that DOD continued to
purchase. We inspected excess items or called warehouse personnel to
confirm they were new and unused. We used FEDLOG24 data and interviewed
supply inventory item managers to confirm that the items were still being
purchased, used, or both by the military services.

To illustrate waste and inefficiency associated with transfers and
donations of excess A-condition commodities to entities outside of DOD, we
used the GSA Federal Disposal System, available to all federal agencies,
to requisition several new and unused excess DOD commodity items,
including a medical instrument chest, two power supply units, and two
circuit cards, at no charge. These items had an original DOD acquisition
cost of $55,817, and we paid only $5 shipping cost to obtain all of them.
We obtained these items from two DRMOs and a DLA supply depot. The
following discussion presents the details of our case study requisitions.

Medical instrument chest. We requisitioned at no cost a new, unused
medical instrument chest with a reported acquisition cost of $784 from the
Lewis DRMO in Fort Lewis, Washington. When we visited the Lewis DRMO to
screen for and tag new, unused items, a DRMO official told us that about
20 percent of the Lewis DRMO receipts are new, unused items. The medical
instrument chest that we obtained was one of 16 excess medical chests
turned in by the Fort Lewis Army Medical Hospital on May 6, 2004. At the
time of our requisition on June 2, 2004, the Army, Navy, and Air Force
medical logistics commands were continuing to purchase these medical
chests from DLA.

The excess DOD medical instrument chest that we requisitioned is designed
for maximum support of deployed medical personnel. For

24 FEDLOG is a logistics information system managed by the Defense
Logistics Information Service within DLA. This system contains detailed
information on specifications, use, acquisition cost, and sources of
supply for NSN items, including more than 7 million stock numbers and more
than 12 million part numbers.

example, the chest is designed to store medical instruments and protect
them during shipment as well as to provide shelves and tables for use
during surgery and other medical procedures in the battlefield. Figure 6
is a photograph of the excess DOD medical instrument chest assembled for
maximum use.

Figure6: Medical Instrument Chest Assembled for Maximum Utilization

Source: GAO.

Circuit cards. On September 7, 2004, we requisitioned two circuit cards
with a total original acquisition cost of $8,684, from the Hill DRMO. We
paid $5 shipping cost and received the circuit cards on September 27,
2004. Circuit cards are circuit boards consisting of a series of flat
plastic or fiberglass layers (usually 2 to 10) that are glued together
after a circuit has been etched in them. In a computer, a circuit card
holds the integrated circuits and other electronic components that provide
power to perform certain designated functions, such as computerized
program functions or electronic communications functions. According to the
Navy inventory item manager and the National Security Agency technical
support team leader, the circuit cards that we obtained are used in secure
satellite communications gear.

The circuit cards that we obtained were turned in by the DLA supply depot
in Ogden, Utah, as excess to Air Force needs in February 2004. The Navy
item manager told us that although the circuit cards were no longer being
purchased, they were still in active inventory and were still being used
by some Navy units and foreign military sales customers at the time we
obtained them. Our Chief Technologist inspected the circuit cards and
confirmed that they included communications circuitry and were in new,
unused condition. Figure 7 is a photograph of one of the circuit cards we
requisitioned.

Figure7: One of the New,Unused Excess DODCircuit Cards Transferred to GAO
in September 2004

Source: GAO.

Power supply units. We requisitioned, at no cost, two high-cost power
supply units from the DLA supply depot in Norfolk, Virginia-one with a
reported acquisition cost of $24,797 and another with a reported
acquisition cost of $21,552-a total of $46,349. We received one power
supply unit on September 30, 2004, and the other power supply unit on
October 6, 2004. According to the manufacturer, these power supply units
are part of a super-high-frequency electronics surveillance system, which
is designed to listen and identify radio frequencies. The power supply
units convert AC power to DC voltage to provide power to the assemblies
inside the surveillance system.

We contacted the Navy inventory control point program manager to inquire
about the use of the power supply units that we had identified. The
program manager explained that both of the power supply units are

currently used in the electronic warfare system of the Seawolf fast attack
nuclear submarine.25 The Navy official stated that although DLA is not
currently purchasing these items due to a planned upgrade in technology,
the Navy has a very small number of these power supply units in inventory
and the items remaining at the DLA supply depot should not have been
excessed because they may be needed before the technology upgrade is
completed. Our Chief Technologist inspected the excess DOD power supply
units we obtained and confirmed that they had never been used. Figure 8 is
a photograph of one of the power supply units that we obtained.

Figure8: New, Unused DOD Power Supply Unit Requisitioned by GAO in
September 2004 from the DLA Depot in Norfolk, Virginia

                                  Source: GAO.

Case Study Purchases of New, Unused DOD Commodities

In addition to using the GSA process available to federal agencies to
obtain excess DOD property at no cost, we also purchased, at minimal cost,

25 The Seawolf supports missions such as surveillance, intelligence
collection, special warfare, covert cruise missile strike, mine warfare,
and antisubmarine and antisurface ship warfare.

several excess DOD commodity items in new and unused condition over the
Internet at govliquidation.com-the DRMS liquidation contractor's Web
site.26 The items we purchased included tents, boots, three gasoline
burners (stove/heating unit), a medical suction apparatus, and bandages
and other medical supply items with a total reported acquisition cost of
$12,310. We paid a total of $1,466 for these items, about 12 cents on the
dollar, including buyer's premium, tax, and shipping cost. The following
examples illustrate the results of our case study investigations and
purchases.

New, unused extreme cold weather boots. On September 30, 2004, we
purchased several pairs of excess new, unused extreme cold weather boots
over the Internet at govliquidation.com. The sales advertisement listed an
acquisition cost of $3,900 for approximately 30 pairs of the boots. We
paid a total of $483, including buyer's premium, tax, and transportation
cost, to acquire the extreme cold weather boots. According to a Stockton
DRMO official, the boots were found at the DRMO without identifying
paperwork, and DRMO personnel entered them in excess property inventory in
April 2004. The boots were advertised as being in H condition
(unserviceable, condemned condition). However, the photograph on the
govliquidation.com Web page showed that the manufacturer's product label
was still tied to the laces of the boots and that the soles of the boots
had no wear, indicating that they had not been worn. When we received the
boots on October 12, 2004, we determined that we had, in fact, purchased a
total of 42 pairs of cold weather boots of which 37 pairs were in new,
unused condition. We paid about $12 per pair for the 42 pairs of boots,
which have a listed acquisition cost of $135 per pair.

Shortly after we purchased the excess cold weather boots, the DLA item
manager told us that she recently placed an order with the vendor to
purchase 31,420 pairs of these same boots, including 1,360 of the sizes of
boots that we purchased. Further, the DLA technician responsible for these
boots told us that the boots have a shelf life of up to 15 years.
According to the DLA technician, the boots should be inspected after the
first 5 years and then inspected every 2 years after that for a total of
six inspections in 15 years. After 15 years from date of manufacture these
boots would have surpassed their useful life. All of the boots we
purchased were less than 5 years old. The DLA technician told us that none
of these

26 Government Liquidation, LLC is the DRMS commercial venture partner
(contractor) for public sales of excess DOD property.

boots have been recalled, and they are considered excellent boots that are
rated to 60 degrees below zero. Figure 9 is a photograph of the new,
unused excess DOD boots that we purchased.

Figure9: New, Unused Excess Cold Weather Boots Purchased in September 2004

Source: GAO.

Shelter Half-tents. We purchased several new, unused shelter half-tents
over the Internet from govliquidation.com on August 26, 2004. We paid
$548, including buyer's premium, tax, and shipping cost, to acquire the
excess DOD shelter half-tents, which had a listed acquisition value of
$2,122. Shelter half-tents can be carried by individual soldiers and must
be joined together to form a tent that will house two soldiers. The tents
were listed in H condition (unserviceable, condemned condition). However,
the advertisement on the liquidation contractor's Web page stated that
some of the tents were new and in original boxes, and the photograph on
the sales Web page showed that most of the tents were in the original
manufacturer's packages. Upon receipt of the tents, we determined that we
had, in fact,

purchased 21 new, unused tents and 6 additional tents that were used, but
appeared to be in good condition. At the time we purchased the shelter
half-tents, the DLA item manager told us that none remained in stock. DLA
data showed that the Defense Supply Center, Philadelphia, placed an order
for 35,000 of these tents at a cost of about $2.5 million. Figure 10 is a
photograph of one of the new, unused excess DOD shelter half-tents that we
purchased over the Internet at govliquidation.com.

Figure10: New, Unused Excess ShelterHalf-Tent Purchased in August 2004

Source: GAO.

Gasoline burner units. On September 30, 2004, we purchased three new,
unused excess DOD gasoline burner units over the Internet from
govliquidation.com. We paid $164, including buyer's premium, tax, and
shipping cost, to acquire the gasoline burners, which had a listed
acquisition value of $1,857. The gasoline burners, which were turned in as
excess by the California Army National Guard in San Luis Obispo,
California, were advertised as "still in box, have never been used."
According to the DLA item manager, a gasoline burner unit can be used on

the battlefield as either a heat source or as a stove for cooking. The
item manager told us that the units also could be used as stand-alone
field/camping stoves, but would need a grate, or cooking surface over the
burner. The item manager explained that DLA purchased thousands of these
units several years ago, and they are continuing to be issued from supply
inventory and used by deployed troops. According to item manager data, DOD
units purchased 471 of these same gasoline burner units from DLA in fiscal
year 2004. The item manager told us that there are currently 9,500 of
these units in inventory and provided data that showed DLA has continued
to issue gasoline burners to military units. Figure 11 is a photograph of
one of the new, unused excess DOD gasoline burner units that we purchased
over the Internet from govliquidation.com in September 2004. At the end of
our audit in February 2005, we noted continuing liquidation sales of
excess DOD gasoline burner units.

Figure11: One ofthe New,Unused Excess DODGasoline BurnerUnits Purchased in
September 2004

Source: GAO.

Portable oropharyngeal suction apparatus. On October 7, 2004, we purchased
a new, unused portable suction apparatus for the minimum bid of $35. We
paid a total of $105 for the suction apparatus, including buyer's premium,
tax, and shipping, compared to the acquisition cost of $1,141. The suction
apparatus runs on electrical or battery power and is designed for use in
aspirating blood and other fluids in emergency treatment of unconscious or
injured personnel in desert, tropic, or artic environments. The suction
apparatus, which was turned in as excess by a U.S. Air Force Reserve unit
at the March Air Reserve Base in Riverside, California, was coded as being
in F condition (unserviceable, repairable condition). However, the
photograph of the suction apparatus showed the tubing to be sealed in the
original package-indicating that the suction apparatus had not been used.
Documentation we obtained from the DLA item manager showed that during
fiscal year 2004, DLA purchased 627 of these same suction apparatuses,
with a total acquisition cost of $490,439, for issue to military units.
Our in-house medical expert inspected the suction apparatus and confirmed
that it had not been used. He said that the design has not changed for
many years, and the only issue with regard to serviceability would be
whether the battery needed to be replaced. We determined that the
batteries in the unit that we purchased still had a charge, and the unit
was operational. Figure 12 is a photograph of the new, unused excess DOD
portable suction apparatus that we purchased.

Figure12: Photograph of the New, Unused Portable Suction Apparatus
Purchased in October 2004

Source: GAO.

Management Control The $2.2 billion in DOD waste and inefficiency that we
identified stemmed

from management control breakdowns across DOD. We found key
factorsBreakdowns Resulted in the overall DRMS management control
environment that contributed to in Reutilization waste and inefficiency in
the reutilization program, including (1) unreliable Program Waste and
excess property inventory data; (2) inadequate DRMS oversight,

accountability, physical control, and safeguarding of property;
andInefficiency (3) outdated, nonintegrated excess inventory and supply
systems. In addition, for many years, our audits of DOD inventory
management27 have

27 GAO-04-689 and GAO-03-98.

reported that continuing unresolved logistics management weaknesses have
resulted in DOD purchasing more inventory than it needed. Our analysis of
fiscal year 2002 and 2003 excess commodity turn-ins showed that $1.4
billion (40 percent) of the $3.5 billion of A-condition excess items
consisted of new, unused DLA supply depot inventory.

    Unreliable Data Impair the Economy and Efficiency of the Reutilization
    Program

Types of Inventory Errors

Our statistical tests of excess commodity inventory and our case studies,
screening visits, and interviews lead us to conclude that unreliable data
are a key cause of the ineffective excess property reutilization program.
GAO's internal control standards28 require assets to be periodically
verified to control records. In addition, DRMS policy29 requires DRMO
personnel to verify turn-in information, including item description,
quantity, condition code, and demilitarization code, at the time excess
property is received and entered into DRMO inventory. However, we found
that DRMS management has not enforced this requirement. Further, Army,
Navy, and Air Force officials told us that unreliable data are a
disincentive to reutilization because of the negative impact on their
operations. DLA item managers told us that because military units have
lost confidence in the reliability of data on excess property reported by
DRMS, for the most part, they have requested purchases of new items
instead of reutilizing excess items. Military users also cited examples of
damage to excess items during shipment that rendered the items unusable.
In addition, other reutilization users advised us of problems related to
differences in quantities and the types of items ordered and received that
could have a negative impact on their operations.

Our statistical tests found significant problems with controls for
assuring the accuracy of excess property inventory. Overall error rates
for the five DRMOs we tested ranged from 8 percent at one DRMO to 47
percent at another, and error rates for the five DLA supply depots we
tested ranged from 6 percent to 16 percent, including errors related to
physical existence of turn-ins and condition code. Our physical existence
tests included whether a turn-in recorded in inventory could be physically
located, timely recording of transactions, and verification of item
description and quantity.

28 GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).

29 DRMS-I 4160.14, vol. II, Instructions for Warehousing for DRMS and the
Defense Reutilization and Marketing Offices, ch. 2, "Receipt and Storage,"
S: 1 (A) (9).

Table 4 shows the overall results of our statistical sampling tests at
five DRMOs and five DLA supply depots. The specific criteria we used to
conclude on the effectiveness of DRMO and DLA depot inventory controls at
the tested locations are included in appendix V.

Table4: Turn-in Transactions with One or More Control Test Failures at
Five DRMOs and Five DLA Supply Depots

                        Estimated errors DLA supply depot    Estimated errors 
          DRMO tested          (percent)             tested         (percent) 
             Richmond                 25           Richmond 
             Stockton                 12        San Joaquin 
                 Hill                  8               Hill 
              Norfolk                 18            Norfolk 
             Columbus                 47           Columbus 

Source: GAO.

Note: Although some transactions included more than one type of error, we
only counted one failure for a transaction.

Key types of data reliability errors that we found include the following.

o 	Existence errors. Missing turn-ins30 in our statistical sample included
entire turn-ins of excess commodity items, such as sleeping bags, cold
weather clothing, wet weather parkas, chemical and biological protective
suits, a computer, and monitors. DRMO officials could not locate
documentation to show whether the missing turn-ins had been reutilized,
transferred, sold, or destroyed. Because many items from our statistical
sample could not be found, the issue of lost, missing, and stolen property
is significant, as discussed later.

o 	Quantity errors. Separate from missing turn-ins, quantity errors
involved items that exceeded or fell short of quantities recorded on a
turn-in transaction. Shortages represent items that appeared to be
available but were missing. Because DRMO personnel do not always verify
quantities at the time excess items are received and recorded into excess
inventory, they cannot determine whether missing quantities are

30 A turn-in transaction consists of one or more items, such as a computer
or 2,000 helmets, on a turn-in document.

errors or if they represent items that are lost, missing, or stolen.
Quantity shortages included cold weather, wet weather, and camouflage
clothing; field packs; chemical and biological protective suits and
gloves; and computer keyboards.

o 	Lack of timely transaction recording. DRMO personnel did not always
record transactions to reflect events, such as changes in warehouse
location and shipments to customers or disposal contractors within 7 days.
Based on our screening and inventory testing experience, when time is
wasted looking for such items, customers can become frustrated, leading to
possible loss of future orders. Excess property users told us that they
spend a lot of time visiting DRMO warehouses to locate and inspect excess
items before they submit requisitions for them.

o 	Inaccurate item descriptions. Our statistical sample identified several
turn-in transactions involving items that were different from the types of
items recorded in the inventory records. Item description errors included
erroneous item names and stock numbers. For example, we found three
instances at one DRMO where turn-ins of computer keyboards were listed in
excess inventory records as speakers and one instance at another DRMO
where speakers were recorded as keyboards. Our sample also identified one
women's coat and one men's coat that were recorded in excess inventory as
two women's coats and items that were recorded as wet weather trousers and
camouflage trousers when the turn-in boxes contained multiple items,
including wet weather trousers and parkas, camouflage pants, shirts, and
coats, and flyer's coveralls. When batched items are recorded as one type
of item, only the NSN for those items is listed in inventory. As a result,
a customer could order what he or she believed to be the listed quantity
of the named item but instead receive various quantities of multiple types
of items.

o 	Inaccurate condition coding. Our statistical sample found condition
code error rates that ranged from 5 percent at one DRMO to 22 percent at
two other DRMOs that we tested. We based our determinations of condition
coding accuracy on physical observation of condition with regard to the
broad categories of serviceable and unserviceable rather than testing
specific coding within these categories, which could have resulted in an
even higher error rate. Our sample identified numerous examples of new,
unused excess inventory items that were incorrectly coded as being in
unserviceable condition, including cold weather boots, cold weather
undershirts, military trousers, women's blue dress

uniforms, compressor parts kits, wet weather parkas, and fragment body
armor. In addition to items in our statistical sample, we observed
numerous other new, unused items in DRMO warehouses and at liquidation
sales locations that were coded as unserviceable, including desert combat
boots, camouflage clothing, computer equipment, and aircraft parts.
Accurate condition codes are key to an effective excess property
reutilization program because DOD units generally look for new, unused
excess items for reutilization.

Causes of Inventory Errors	We found that unreliable excess property
inventory data are the result of breakdowns in controls for proper
recording and verification of inventory transaction data. The control
breakdowns we identified related to four major areas: (1) the failure of
DRMO personnel to verify excess property turn-ins at the time they are
received and entered into excess inventory records; (2) improper
downgrading of condition codes by DOD units; (3) the inconsistent use of
NSNs; and (4) human capital issues related to DRMO staffing and workload
and military service procedures, training, and oversight of excess
property reporting.

Failure to verify turn-ins and correct errors. The errors in excess
inventory identified in our statistical samples, screening observations,
and case studies were caused by inaccurate turn-in documentation submitted
by military unit turn-in generators and the failure of DRMO personnel to
inspect excess items, verify turn-in documents, and correct identified
errors. DRMS policy31 requires DRMO personnel to inspect excess items upon
receipt and challenge or change incorrect data. However, DRMO personnel
told us that they were not able to verify excess property receipts when
faced with large turn-in volumes and processing backlogs. Further, a
provision in this same policy32 allows DRMO managers who are faced with
heavy turn-in volume to waive the requirement to verify quantity counts,
if the time required to count the property is not justified, and instead
use turn-in generator counts. The policy limits exceptions to (1) batched
turnins of multiple types of items, (2) large quantities of small items in
other than the original package, and (3) large quantities of items in the
original package where box counts can be used. However, officials at two
of the five DRMOs we tested-the DRMOs with the highest data reliability
error

31 DRMS-I 4160.14, vol. II, ch. 2., S: 1 (A)(9). 32 DRMS-I 4160.14, vol.
II, ch. 2, S: 1 (B)(6)(c).

rates-cited this policy and told us that they accept turn-in generator
information and do not verify excess property turn-in data.

In addition, our statistical sample identified one instance where DRMS
headquarters officials did not provide guidance on how to correct
erroneous turn-in documentation related to a June 30, 2004, Navy turn-in
of six new, unused Level III biological safety cabinets33 with a total
acquisition cost of $120,000. 34 The Navy unit improperly used a local
stock number (LSN) 35 to describe the safety cabinets on the turn-in
document and a demilitarization code that indicated there were no
restrictions on the disposal of these items. However, Level III safety
cabinets are subject to trade security controls,36 and therefore, they are
required to be identified by an NSN or other information which accurately
describes the item, the end item application, and the applicable
demilitarization code.37 Although Norfolk DRMO personnel advised DRMS
officials of the need to correct the turn-in document errors in July 2004,
at the time we finalized our draft report in early February 2005, DRMS had
not taken action to authorize the DRMO to correct these errors so that the
safety cabinets could be identified for reutilization within DOD. Further,
we found that as of the end of our audit in February 2005, the safety
cabinets had not been posted to the DRMS reutilization Web page as excess
property available for reutilization. Figure 13 shows a photograph of one
of the Level III cabinets.

33 The technical name for these safety cabinets is closed loop containment
isolators.

34 The Navy's Environmental Health Center in Portsmouth, Virginia, turned
in the Level III cabinets as excess because of erroneous specifications
that resulted in ordering cabinets that were too large and cumbersome to
meet deployment needs.

35 An LSN consists of the four-digit federal supply classification number,
a two-digit NATO code, and up to a seven-character description, such as
"monitor" for a computer monitor and "boots" for cold weather boots.

36 Commerce Control List, 15 C.F.R. pt. 774, supp. 1, category 2,
Materials Processing, para. f (2), Protective and Containment Equipment
(2005).

37 DOD 4160.21-M-1, Defense Demilitarization Manual, ch.1, S: D (6), and
app. 5 (B), and DRMS-I 4160.14, vol. VII, ch. 3, "MLI/CCLI - Disposal
Processing and Demilitarization," para. A (2)(d).

Figure13: New, Unused Excess Level III Biological Safety Cabinet at the
Norfolk DRMO

Source: GAO.

Improper downgrading of condition codes. The incorrect recording of
unserviceable condition codes for items that are in serviceable condition,
particularly items in new, unused condition, makes it unlikely that they
will be selected for reutilization. For example, all of the new, unused
excess DOD commodity items that we purchased over the Internet were
incorrectly coded as unserviceable. As noted previously in our case study
discussions, all of the items that we purchased were items that military
units continued to purchase, use, or both. As shown in table 5, our DRMO
tests found that most errors related to items that were incorrectly
reported to be in unserviceable condition.

Table5: Estimated Turn-in Transaction Control Test Failures for Items
Classified as Serviceable

                             Percentage of turn-ins

                              Improperly coded in         Improperly coded in 
            DRMO tested     serviceable condition     unserviceable condition 
               Richmond                         0 
               Stockton                         1 
                   Hill                         2 
                Norfolk                         5 
               Columbus                         1 

Source: GAO.

As shown in table 5, we found numerous instances where DOD units
improperly downgraded the condition codes of items that were no longer
serviceable to them, either because they did not want these items or
because the items were being replaced by new technology, even though in
many cases these items were new and unused. Our statistical tests and our
case studies showed that many times the items that military units coded as
unserviceable were serviceable and very adequate for use by others.

Inconsistent recording of NSNs. The failure to consistently record NSNs to
commodity purchase and excess inventory records prevents the
identification of like items for reutilization and, therefore, may result
in unnecessary purchases. Although DLA records NSNs for most purchases
that are stored in DLA supply depot inventory,38 it does not record NSNs
for items purchased from prime vendors39 for direct delivery to DOD
customers. For example, as noted previously, we determined that DLA buyers
and item managers did not record NSNs for 87 percent of the nearly $5.7
billion in medical commodity purchases by military units during fiscal
years 2002 and 2003. According to DLA officials, prime vendor catalogs
identify products by part number or model number rather than NSN. This
issue will become more significant as DLA expands its use of prime vendors
to other commodity groups.

38 DLA records part numbers instead of NSNs for some supply inventory
items.

39 DOD prime vendors are contractors that buy inventory from a variety of
suppliers and store it in commercial warehouses. Most prime vendors ship
items to customers the next day.

The failure to record NSNs to turn-in transactions prevents item managers
from identifying these items for reutilization at the time purchase
decisions are made. For example, our in-house scientists who often meet
with DOD scientists at the U.S. Army Biological Warfare Research Center at
the Dugway Proving Ground learned that the DOD scientists were planning to
purchase a Level III safety cabinet and informed them of the availability
of the six Level III safety cabinets at the Norfolk DRMO. The DOD
scientists told us that they were unaware the Navy had excessed the safety
cabinets and said that they could use all six of them. We subsequently
confirmed that the DOD scientists at Dugway had requisitioned the six
Level III safety cabinets for reutilization.

Our analysis showed that LSNs were recorded for about 41 percent of fiscal
year 2002 and 2003 excess property turn-ins. LSNs are appropriate
identifiers for local purchases and one-of-a kind items. However, our
statistical samples and case studies showed that military unit turn-in
generators had recorded LSNs to items that should have been identified
with NSNs to avoid the time and effort necessary to identify and record
NSNs. For example, LSNs were recorded for excess military clothing in our
Columbus DRMO sample and the cold weather boots that we purchased over the
Internet even though these items have labels that showed the assigned
NSNs.

DOD has efforts under way to promote the use of unique product identifiers
other than NSNs by commercial vendors and small business firms. Regardless
of the mechanism used to identify standard items, to assure an effective
excess property reutilization program, DOD will need to consistently
record NSNs, product numbers, or other unique item identification in its
purchase, supply, and excess inventory records.

Human capital weaknesses. We found that human capital issues related to
imbalances between staffing and workload at DRMOs40 and inadequate
training of military turn-in generators41 contributed to unreliable data
and associated waste and inefficiency. Based on our interviews of DRMO
officials, our statistical tests of DRMO inventory, and our review of
available DRMS workload data for the five DRMOs we tested, we concluded
that data reliability was directly affected by the availability of DRMO
staff qualified to process excess property receipts.42 For example, DRMS
data for the last 8 months of fiscal year 2004 showed the three DRMOs we
visited that attempted to verify turn-in documentation- Norfolk, Hill, and
Stockton-experienced backlogs in receipt processing and significant use of
overtime hours. In contrast, we found that the two DRMOs that did not
verify receipts worked few, if any, overtime hours and had significantly
fewer backlogs than the other three DRMOs. As noted previously, these two
DRMOs also had high excess property inventory error rates.

We also found a lack of detailed guidance on the proper assignment of
condition codes. DRMS condition code guidance consists of a list of supply
and disposal condition codes and brief definitions of each condition code.
DRMS has not developed detailed narrative guidance with explanations and
examples of how to apply these codes. However, we also found that the
military services are not correctly using the listed supply and disposal
condition codes on their excess property turn-in documents. For example,
when military units assigned supply condition codes indicating that new,
unused items were unserviceable or condemned, they also used the disposal
condition code for repairable, rather than the code for new, unused.
Military units had differing views about whether unserviceable condition
meant that items were unserviceable for their purposes or unserviceable to
anyone. As a result, we found that items in the same condition would be
coded serviceable by one military unit and unserviceable by another. In
addition, our analysis of turn-ins of

40 According to DRMO officials, since the inception of a DRMS warehouse
services contract in June 2000, DRMO staffs have been downsized pending
outsourcing.

41 Turn-in generator refers to DOD units and others that report or
physically turn in excess items to DRMS.

42 According to DRMO officials, only experienced property management
specialists are qualified to inspect excess property receipts and make
appropriate decisions for handling various types of property, including
hazardous materials, flight-safety critical items, items with safety and
latent defects, and items with demilitarization requirements.

unserviceable items found a lack of training, guidance, and supervision at
one Navy unit. For example, Navy officials at the North Island Naval
Aviation Depot told us that the employee responsible for sending their
excess property to the DRMO had never received formal training on disposal
policies and procedures. Further, the officials told us that they did not
have any manuals or written procedures that explained excess property
turn-in procedures. As a result, the employee assigned condition codes H
(unserviceable, condemned) or S (scrap) to all excess property turn-ins.

We contacted GSA's Director of Personal Property Management Policy to
discuss the proper assignment of federal agency condition codes. The GSA
Policy Director explained that DOD uses unique supply condition codes that
are a combination of federal agency codes established by GSA and its own
codes for identifying serviceable and unserviceable property. (App. III
lists and defines the GSA and DOD condition codes.) The GSA Director told
us that unreliable federal agency condition codes, including DOD condition
codes, have presented a problem in GSA's program for utilization of excess
federal agency property within the federal government. For example, he
noted that federal agency officials have told GSA that they cannot rely on
condition codes assigned to excess property, and this had an impact on the
effectiveness of GSA's efforts to promote the use of excess DOD property
within the federal government.

We also found that the condition codes established by GSA do not provide
for the identification of items that are nearly new, with little or no
evidence of use. Because such items are not new and unused, they would be
coded the same as items that may be well used and need minor repair.
Further, the GSA codes do not provide for identification of items that are
new and unused but technically obsolete to the current owner. The GSA
Policy Director noted that because of the federal government's increased
reliance on technology, the need to identify obsolete items is becoming a
governmentwide excess property disposal issue. He said that GSA would be
willing to work with DOD and other federal agencies to develop a solution
to these problems.

Weaknesses in Reutilization We found hundreds of millions of dollars in
potential waste and inefficiency Program Oversight and associated with the
failure to safeguard excess property inventory from Physical Inventory
Control loss, theft, and damage. As previously discussed, our statistical
tests of

excess commodity inventory at five DRMOs and five DLA supply depots
identified significant numbers of missing items. Because the DRMOs and DLA
supply depots had no documentation to show that these items had

been requisitioned or sent to disposal contractors, they cannot assure
that these items have not been stolen. According to DRMS data, DRMOs and
DLA supply depots reported a total of $466 million in excess property
losses related to damage, missing items, theft, and unverified adjustments
over a period of 3 years. However, as discussed below, we have indications
that this number is not complete. Also, because nearly half of the missing
items reported involved military and commercial technology that required
control to prevent release to unauthorized parties, the types of missing
items were often more significant than the number of missing items.

Excess Property Losses	Weaknesses in accountability that resulted in lost
and stolen property contributed to waste and inefficiency in the excess
property reutilization program. As shown in table 6, our analysis of
reported information on excess property losses at DRMOs and DLA supply
depots found that reported losses for fiscal years 2002 through 2004
totaled $466 million. Because 43 percent of the reported losses related to
military technology items that required demilitarization controls,43 these
weaknesses also reflect security risks. GAO Standards for Internal Control
in the Federal Government 44 requires agencies to establish physical
control to secure and safeguard assets, including inventories and
equipment, which might be vulnerable to risk of loss or unauthorized use.
However, our statistical tests of excess commodity inventory at five DRMOs
and five DLA supply depots during fiscal year 2004 identified missing
items involving entire turn-ins of some excess items as well as fewer
items than reported in inventory (missing quantities) for other turn-ins.
We referred locations with high occurrences of reported losses to our
Office of Special Investigations for further investigation. Table 6 shows
reported losses for fiscal years 2002 through 2004.

43 DOD 4160.21-M-1, Defense Demilitarization Manual, ch. 1. 44
GAO/AIMD-00-21.3.1.

          Table6: Reported DRMS Excess Property Losses and Adjustments

Dollars in millions

                             Fiscal year   Fiscal year    Fiscal year 
                   Location          2002          2003     2004        Total 
                      DRMOs           $81           $47      $62         $190 
          DLA supply depots            67            95      114          276 
                      Total          $148          $142     $176         $466 

Source: Unaudited DRMS data.

DRMO losses. Our statistical samples identified missing turn-ins at two of
the five DRMOs we tested and missing quantities at all five DRMOs tested,
including many items that were in new, unused, and excellent condition.
Because DRMO officials did not have documentation to show whether these
items had been reutilized, transferred, sold, or destroyed, there is no
assurance of whether the missing items reflected bookkeeping errors or if
they related to theft. Missing items in our Columbus DRMO sample included
turn-ins of 72 chemical and biological protective suits and 47 wet weather
parkas that were subject to demilitarization controls and 7 sleeping bags,
a cold weather coat, 4 pairs of cold weather trousers, 4 canteens, a
central processing unit (CPU), and various other items. Most of the
quantity errors we found at the Columbus DRMO related to military clothing
items. Missing items in our Richmond DRMO sample included a computer; 10
CPUs; 13 computer monitors; 2 scanners; and 2 items that require trade
security control, including an arm assembly for a helicopter blade and a
computer data signal coder/decoder.

Based on these losses, we requested DRMS summary reports on losses for all
DRMOS during fiscal years 2002, 2003, and 2004 for further analysis.
Reported losses include lost, damaged, and stolen items and adjustments
for recordkeeping errors. We determined that the loss summary reports do
not include all known losses. For example, only one of the nine turn-ins
in our statistical sample that included missing items that were subject to
demilitarization controls was included in the fiscal year 2004 loss
summary reports. Further, missing quantities are generally reported as
adjustments rather than lost or stolen items.

According to DRMS data, of the total $62 million in reported fiscal year
2004 losses, the Warner Robins DRMO reported $22 million and the four DRMS
demilitarization centers reported over $17 million. In addition, reported
fiscal year 2004 losses at the contractor-operated Meade DRMO included
over 1,000 turn-ins with a reported acquisition value of over $3 million
dollars. Although the DRMO contract provides for fines of $2,500 per
incident of loss if negligence is proven, we learned that contractor
negligence could not be proven due to documented security weaknesses at
the Meade DRMO.45 Uncorrected security weaknesses leave the Meade DRMO
vulnerable to theft.

Further, while DRMO loss reports require that a reason code be specified,
we found that the reasons for nearly all (99.8 percent) of the reported
DRMO losses for fiscal years 2002 through 2004 related to unknown reasons
(76.6 percent) and unverified adjustments for bookkeeping and data-entry
errors (23.2 percent). As a result, DRMS has no assurance of the extent to
which theft may have occurred and gone undetected. In January 2005, DRMS
officials told us that they had not yet performed a review of the excess
property loss reports as a basis for identifying and correcting systemic
weaknesses.

Reported DRMO losses for the 3-year period included 76 units of body
armor, 75 chemical and biological protective suits (in addition to those
identified in our Columbus DRMO sample),46 5 guided missile warheads,47
and hundreds of military cold weather parkas and trousers and camouflage
coats and trousers. Three DRMOs-Kaiserslautern, Meade, and
Tobyhanna-accounted for $840,147, or about 45 percent, of the nearly $1.9
million in reported fiscal year 2004 losses of military equipment items
requiring demilitarization.

45 DRMS and contractor documentation we obtained noted that the contractor
had taken issue on numerous occasions with the lack of security over
accountable inventories at all locations it manages, including 11 DRMOs in
fiscal year 2003 and 9 DRMOs in fiscal year 2004.

46 The missing chemical and biological protective suits are not the
current JSLIST, and the missing body armor is not the ceramic technology
currently in use by deployed troops.

47 In accordance with DOD 4160.21-M, ch. 4, "Property Requiring Special
Processing," S: B, and DRMS-I 4160.14, vol. VII, "Instructions for
Demilitarization for DRMS and the Defense Reutilization and Marketing
Offices," ch. 1, para. G, such items are required to be inert before
turn-in to a DRMO.

DLA supply depot losses. Our statistical samples also showed missing items
at four of the five DLA supply depots that we tested. Because depot
officials did not have documentation showing that these items had been
reutilized or sold, there is no assurance of whether the missing items
related to theft. Missing items in our DLA depot statistical samples
included the following:

o 	Two classified radio frequency amplifiers, a printed circuit board that
is subject to trade security controls, and a circuit card assembly that
required demilitarization (destruction) when no longer needed by DOD at
DLA's Norfolk supply depot.

o 	Trade security-controlled aircraft parts, including 17 aircraft landing
gear drag link assemblies, 6 landing gear upper manifolds, and 3 cylinder
and piston units used in aircraft landing gear at DLA's Hill supply depot.

o 	Six computer controllers and a circuit card used in Army, Navy, and Air
Force communications at DLA's San Joaquin supply depot.

We also obtained DRMS data on DLA supply depot reports of excess property
losses, including missing and damaged property and unverified adjustments.
As shown in table 6, reported DLA supply depot losses totaled $276 million
for fiscal years 2002 through 2004. Of this amount, nearly $192 million
related to excess property items that were subject to demilitarization and
trade security controls. The summary reports that we obtained did not
identify the reasons for most of the reported DLA supply depot losses.
According to DRMS data, 18 DLA supply depots reported a total of $114
million in fiscal year 2004 excess property losses. Two supply depots
reported 72 percent of these losses, including the DLA Oklahoma City
supply depot with reported losses of 213,950 items totaling $41 million
and DLA's Warner Robins supply depot with reported losses of 4,911 items
totaling $40 million. In addition, the San Diego and Tobyhanna DLA supply
depots each reported about $6 million in fiscal year 2004 excess property
losses. Types of items reported as lost, damaged, or possibly stolen
included aircraft frames and parts, engines, laboratory equipment, and
computers.

Property Damage	In addition to reported losses, we found significant
instances of property damage at DRMS liquidation contractor sales
locations. Because all liquidation sales are final, buyers have no
recourse when property is damaged subsequent to sale or is not in the
advertised condition. As a result, customers who have lost money on bids
related to damaged and

unusable items might not bid again, or they may scale back on the amount
of their bids in the future, affecting both the volume of excess DOD items
liquidated and sales proceeds. The property damage that we observed at
liquidation contractor sales locations is primarily the result of DRMS
management decisions to send excess DLA supply depot property to two
national liquidation sales locations without assuring that its contractor
had sufficient human capital resources and warehouse capacity to process,
properly store, and sell the volume of property received.

Although DRMS headquarters officials were aware of this problem and made
numerous visits to the Huntsville sales location beginning in January
2004, actions taken to address this problem have been inadequate. In
addition, poorly maintained contractor warehouse facilities at one
liquidation sales location resulted in severe water damage to excess DOD
bandages and medical supply items that we purchased over the Internet at
govliquidation.com. The DRMS liquidation sales contract and Web page
conditions of sale state that DRMS is responsible for providing and
maintaining the warehouse facilities used by the contractor.

Property damage at the Huntsville, Alabama, liquidation sales location. In
November 2004, we investigated reports of damage related to improper
outside storage of excess items at the Huntsville, Alabama, liquidation
sales location. In June 2003, DRMS initiated a recycle control point
process, referred to as RCP, for DLA supply depots, whereby excess
property remains in the depot warehouses during the reutilization
screening process. At the end of the screening phase, property that does
not require demilitarization by destruction or mutilation is to be shipped
to one of two liquidation contractor national sales locations-Huntsville,
Alabama, for DLA depots west of the Mississippi River and Norfolk,
Virginia, for DLA depots east of the Mississippi. We determined that DRMS
continued to send excess DLA supply depot property to the Huntsville sales
location even though it was apparent after the first 6 months of shipments
that the Huntsville location lacked the capacity to handle the large
volume of property received from the DLA depots. For example, in early
June 2004, the Area Manager for the Huntsville DRMO inspected the
liquidation contractor's warehouses and found that excess property had
filled at least one contractor warehouse building entirely, blocking doors
and fire extinguishers. The Area Manager advised contractor officials that
this situation would not be viewed favorably during the joint safety,
fire, and environmental inspection anticipated within the near future. In
response, contractor officials removed sufficient property from the
building to meet fire and safety regulations. As a result, numerous excess
DOD property

items were relocated outside to an unpaved lot about the size of a
football field and covered with a number of blue plastic tarps. Most of
these items were new and unused spare parts and electronic items received
from DLA supply depots. In addition, wood furniture and metal file
cabinets that were transferred to the contractor for liquidation sale by
the co-located Huntsville DRMO were stored outside without any protection
from the weather.

According to DRMO officials, DRMS headquarters officials had visited the
Huntsville sales location in March 2004; a second time in June 2004, when
the property was placed on the outside lot; and again in September 2004,
to observe the extent of the overflow. Despite the known risk48 of damaged
and lost property, the volume of excess DLA depot property continued until
September 2004, when DRMS headquarters made a decision to divert shipments
from three western DLA supply depots to the Norfolk, Virginia, liquidation
sales location. However, property continued to be stored outside until the
week of October 18, 2004, when DRMS officials visited the Huntsville sales
location. By that time, numerous property items had received extensive
damage due to sun, wind, rain, and storms, including four
hurricanes-Charlie, Frances, Ivan, and Jeanne-and tropical storms Bonnie
and Matthew. DRMS officials disposed of some items and placed other items
inside the warehouse. In addition, the Huntsville DRMO manager told us
that wood computer furniture and filing cabinets that were in good
condition at the time the DRMO turned them over to the liquidation
contractor had been stored outside unprotected from weather. Because most
of the furniture was ruined and the filing cabinets were rusted, they were
sent to the landfill or sold as scrap. Figure 14 shows the outside
location of the wood computer cabinets and other items in July 2004 when
they were advertised for sale.

48 The DRMS liquidation sales contract stipulates that DRMS is to provide
property storage, maintain liquidation contractor facilities, and bear
financial risk of loss and damage of property in the contractor's
possession.

Figure14: Outside Storage of Wood Computer Furniture at the Huntsville,
Alabama, Liquidation Sales Location in July 2004

Source: DRMS.

Our inspection of the remaining damaged property identified numerous boxes
that were missing property labels or had labels and shipping documentation
that were illegible due to exposure to sun, wind, and rain. The missing
documentation presents a significant problem because the sales contractor
does not record receipts of excess DOD property in its sales inventory
until items are processed for sale, which may not occur until several
months after the items are received. DRMS officials told us that they are
attempting to reconcile excess property shipments to liquidation
contractor inventory. However, because excess property receipts were not
recorded in sales inventory and property labels are missing or illegible,
it will be very difficult, if not impossible, to fully reconcile sales
inventory to excess property receipts. The photograph in figure 15 shows
wooden boxes that have lost their property labels and are turning black
due to rot.

Figure15: Example of Water-Damaged Items at the DRMS Liquidation Sales
Contractor Location in Huntsville, Alabama

Source: GAO.

Property subject to damage at the Norfolk, Virginia, liquidation sales
location. On December 2, 2004, we visited the Norfolk liquidation
contractor sales location to determine whether DRMS action to resolve the
capacity problems at the Huntsville sales location by diverting property
to Norfolk, Virginia, had resulted in capacity problems at that location.
We observed hundreds of cardboard and wooden boxes containing excess DOD
property that were stored outside under blue plastic tarps and in
shrink-wrapped stacks on pallets. Upon inspection, we noted that many of
the boxes were already water-damaged. The photograph in figure 16 shows
cardboard boxes stored outside at the Norfolk, Virginia, sales location
that evidence weather damage in terms of peeling property labels and water
marks.

Figure16: Example of Excess DOD Property StoredOutside at the DOD
Liquidation Sales Contractor Location in Norfolk, Virginia

Source: GAO.

Damage to GAO purchase of bandages and medical supplies. Our October 7,
2004, Internet purchase of bandages and medical supplies from
govliquidation.com suffered water damage because DRMS failed to adequately
maintain the liquidation contractor's Norfolk facilities. Our purchase
included numerous usable items in original manufacturer packaging,
including 35 boxes of bandages, 31 boxes of gauze sponges and surgical
sponges, 12 boxes of latex gloves, and 2 boxes of tracheostomy care sets.
We paid a total of $167, including buyer's premium, tax, and
transportation cost, for these items, which had a reported total
acquisition cost of $3,290. However, the following week, when we arrived
at the liquidation contractor's Norfolk, Virginia, sales location to pick
up our purchase, it was raining and the roof on the contractor's warehouse
building was leaking. The boxes containing the items we had purchased had
become wet, and water dripped from some of the boxes when contractor
personnel loaded them into our rental truck. The photograph in figure 17
illustrates the damaged condition of the items we purchased. Most of the
cardboard storage boxes were deteriorating as a result of water damage,
and items inside the boxes were wet.

Figure17: DOD Excess New, Unused Bandages and Medical Supplies Purchased
over the Internet in October 2004

Source: GAO.

Although the sales lot containing the bandages and medical supplies that
we purchased was advertised as 4 pallets of items, it actually consisted
of 13 pallets. The truck we rented would not accommodate all 13 pallets of
items. The liquidation contractor sales representative told us that we
could take as much as we could accommodate, and the contractor would
resell the remaining items, even though the boxes on the remaining 8
pallets of bandages and medical supplies were also wet.

We found that customers who find that the property they purchased is
damaged have no recourse. Further, the liquidation contractor's terms of
sale provide no incentive for safeguarding property held for sale. For
example, under the contractor's terms of sale, all sales are final and
items are sold in "as is" condition. The liquidation sales contractor
disclaims all warranties, express and implied, without limitation,
including loss or liability resulting from negligence. Credit card account
numbers must be provided at the time a bid is made, and the sales cost,
buyer premium, and sales tax, if applicable, are immediately charged to
the winning bidder.

    Outdated, Nonintegrated Systems Impair Economy and Efficiency

Current Inventory Systems Environment

Inefficient, nonintegrated excess inventory and supply management systems
lack controls necessary to prevent waste and inefficiency in the
reutilization program. For example, because the DRMS Automated Inventory
System (DAISY) and DLA's Standard Automated Materiel Management System
(SAMMS) are outdated and nonintegrated, they do not share information
necessary to (1) identify and alert DLA item managers of excess property
that is available to fill supply orders and (2) prevent purchases of new
items when A-condition excess items are available for reutilization. We
have continued to report49 that long-standing weaknesses with DLA's
inventory systems related to outdated, nonintegrated legacy systems and
processes result in DOD and military units not knowing how many items they
have and where these items are located. DLA has acknowledged serious
deficiencies in its automated inventory management systems. Although DLA
has an effort under way to replace SAMMS with the Business Systems
Modernization (BSM) and DRMS has a Reutilization Modernization Program
(RMP) under way to upgrade DAISY, so far these have been separate,
uncoordinated efforts and they do not adequately address identified
process deficiencies. Also, while the systems improvement efforts are
intended to integrate supply and excess inventory systems to support the
reutilization program, they are not focused on resolving long-standing
problems related to unreliable condition code data and incomplete data on
NSNs. The accuracy of these two data elements is critical to the ability
to identify like items that are available for reutilization at the time
purchases are made.

We found that existing systems and processes do not adequately reflect the
DRMS twofold mission to (1) facilitate reutilization of property in good
condition and (2) dispose of property that DOD cannot use. For example,
DRMS moves all excess property through the same 49-day screening and
disposal process rather than identifying A-condition items that are
currently being purchased, stocked and issued, or both to military units
and designating these items for reutilization. Instead, as previously
discussed, DRMS transferred, donated, sold, and destroyed hundreds of
millions of

49 GAO, DOD Business Systems Modernization: Billions Continue to Be
Invested with Inadequate Management Oversight and Accountability,
GAO-04-615 (Washington, D.C.: May 27, 2004); DOD Business Systems
Modernization: Longstanding Management and Oversight Weaknesses Continue
to Put Investments at Risk, GAO-03-553T (Washington, D.C.: Mar. 31, 2003);
and DOD Management: Examples of Inefficient and Ineffective Business
Processes, GAO-02-873T (Washington, D.C.: June 25, 2002).

dollars of A-condition excess items that the military services continued
to purchase and utilize.

In addition, we found that the current process for identifying excess
property that is available to fill supply orders is cumbersome,
timeconsuming, and involves significant human intervention. For example,
under the current process, if an item manager wants to use excess items to
fill a supply order, the item manager must query DAISY to determine
whether excess items are available to fill the supply order. If excess
items are available, the item manager would then need to contact one or
more DRMOs where the excess property is located and ask DRMO personnel to
physically verify the item description, quantity, and condition. If the
excess items meet the customer's requirements, the item manager prepares a
requisition form and submits it to the DRMO(s). If the item does not
require technical inspection or testing, the DRMO processes the order and
ships the excess items to the customer. However, if the item is electronic
and requires technical inspection and testing, or both, it must be sent to
a DLA supply depot where these functions can be performed before the item
is shipped to the customer.

Military unit officials told us that due to inefficiencies in this
process, including shipment delays of up to several weeks and unreliable
DRMS data on quantities and condition codes, they prefer to order new
items rather than attempting to reutilize excess property available at
DRMOs. Figure 18 illustrates the current nonintegrated DLA inventory
systems environment.

Figure18: Existing Nonintegrated DLA Inventory Systems Environment

Source: GAO.

Planned Systems Environment	According to DLA officials, the planned BSM
and RMP excess property reutilization systems are intended to be
integrated when fully implemented in 2009. The objective of the integrated
design is to provide DLA buyer and item manager visibility over excess
property available for reutilization and permit the buyer to fill a supply
order with these items instead of purchasing new items. However, we are
concerned that these efforts may not resolve the long-standing data
reliability problems inherent in the current systems and processes. Our
November and December 2004 discussions with DLA and DRMS systems officials
revealed that they were unaware of the magnitude of errors in condition
coding that incorrectly recorded new and unused items as unserviceable and
the extent of inconsistent recording of NSNs in commodity purchases and
excess inventory records. Further, the officials had not yet coordinated
to identify key data elements for identifying excess property that should
be reutilized.

We also found that DLA and DRMS systems officials had not yet fully
considered building controls into the new business systems that would help
enforce the policy to reutilize available excess property in new, unused,
and excellent condition before purchasing new items. For example, under
the current systems environment, item managers and

military units can choose to purchase new items rather than reutilizing
available new, unused, and excellent condition excess items. In order to
avoid this problem in the planned systems environment, DLA would need to
include edit controls that would reject a purchase transaction or generate
an exception report for review and approval when such items are available
for reutilization but are not selected.

We discussed our concerns with DLA officials. In early February 2005, DLA
officials told us that they were extending the March 2005 target date for
completing the functional design for excess property reutilization in BSM
and RMP in order to address our concerns about the impact of unreliable
data on the successful integration of the planned systems.

Conclusions	DLA and DRMS have not demonstrated the leadership and
accountability necessary to achieve the economy and efficiency of excess
property reutilization contemplated in federal regulations or DOD policy.
To effectively address problems with reutilization program waste and
inefficiency, DRMS and DLA will need to exercise strong leadership and
accountability to improve the reliability of excess property data;
establish effective oversight and physical inventory control, including
both accountability and safeguarding of excess property; and develop
effective integrated systems for identifying and reutilizing excess
property. In addition, the military services will need to provide accurate
information on excess property turn-in documentation, particularly data on
condition codes, and item descriptions, including NSNs. Improved
management of DOD's excess property and a strong reutilization program
could help save taxpayers hundreds of millions of dollars annually.

Recommendations for 	We recommend that the Secretary of Defense direct the
Director of the Defense Logistics Agency; the Commander of the Defense
Reutilization and

Executive Action	Marketing Service; and the Secretaries of the Army, the
Navy, and the Air Force, as appropriate, to take the following 13 actions
to improve DOD's excess property reutilization program.

Data Reliability  o 	Direct DRMS to clarify and enforce the policy that
permits DRMO management to waive the requirement to verify quantities on
turn-ins under exempted conditions, and consider additional criteria for
maintaining accountability of military equipment items.

o 	Require DRMS to identify DRMOs with insufficient human capital
resources and take appropriate action to assure that excess property
receipts are verified and processed in an accurate and timely manner. In
implementing this recommendation, DRMS should require DRMOs to provide
adequate supervision and monitoring to assure that excess property
receipts are verified when received and entered in DRMO inventory.

o 	Require DLA to develop a mechanism for linking prime vendor purchase
transactions to NSNs or other unique product identification.

o 	Direct DRMS to develop written guidance and formal training to assist
DRMO personnel and military service turn-in generators in the proper
assignment of condition codes to excess property turn-ins.

o 	Direct the military services to provide accurate excess property
turn-in documentation to DRMS, including proper assignment of condition
codes and NSNs based on available guidance.

o 	Require the military services to establish appropriate accountability
mechanisms, including supervision and monitoring, for assuring the
reliability of turn-in documents.

Physical Control of Property  o 	Direct DLA and DRMS to review DLA supply
depot and DRMO excess property loss reports to identify systemic
weaknesses and take immediate and appropriate corrective actions to
resolve them.

o 	Direct DRMS to take immediate, appropriate action to resolve identified
uncorrected DRMO security weaknesses.

o 	Require DRMS to determine the monthly sales volume of excess property
at the DLA supply depots and work with its liquidation sales contractor to
identify the appropriate number and liquidation sales locations needed to
handle the sales of excess DLA depot property. In making these
determinations, DRMS and its contractor should consider whether contractor
staffing and warehouse capacity at each location are adequate to handle
the volume of property shipped to those locations for sale.

o 	Require DRMS to periodically inspect liquidation contractor facilities
and take immediate action to correct structural impairments and other

deficiencies, such as outside storage due to inadequate warehouse capacity
that could result in damage of excess DOD property held for sale.

    Commodity Inventory Systems

o 	Direct DLA and DRMS to consider available options and implement an
interim process for identifying turn-ins of excess new, unused, and
excellent condition items that could be reutilized to avoid unnecessary
purchases in the existing systems environment.

o 	Direct DLA BSM and DRMS RMP systems officials to coordinate on the
identification of key data elements for identifying excess property that
should be reutilized before completing the design of functional
requirements for reutilization of excess commodities for BSM and RMP.

o 	Require that DLA's BSM system design include edit controls that would
reject a purchase transaction or generate an exception report when
Acondition excess items are available but are not selected for
reutilization at the time that purchases are made.

  Agency Comments and Our Evaluation

On April 15, 2005, DOD provided written comments on a draft of this
report. DOD officials concurred with 8 of our 13 recommendations and
partially concurred with the other 5 recommendations. With regard to the 5
recommendations on which DOD partially concurred, DOD's stated actions
address all 5 of them. We view these actions as being generally responsive
to the intent of our recommendations. The partial concurrences relate to
plans for alternative actions, actions already initiated in response to
our audit, and increased attention to existing processes. DOD's
explanation for the partial concurrences and our response follows.

DOD stated that DRMS will use an alternative action to address our
recommendation that it assess the adequacy of human capital resources and
take appropriate action to assure that excess property receipts are
verified and processed accurately and timely. DOD stated that DRMS will
use its staffing model to determine the staffing needs by receipt workload
and adequately staff its DRMOs. DOD also stated that DRMS is using
contract hires to supplement DRMO staff, as needed. We view these actions
as responsive to our recommendation. However, as a part of its actions on
our recommendation, DRMS also should provide adequate supervision and
monitoring to assure that excess property receipts are

verified when received and entered into DRMO inventory. We have modified
our recommendation to emphasize this point. These actions will help to
provide accountability for excess property and avoid the need for
subsequent adjustments, including an excessive number of write-offs for
inventory shortages.

DOD noted the merits of existing processes related to our recommendation
to develop a mechanism for linking prime vendor purchase transactions to
NSNs or other unique product identification. DOD stated that DOD
directives require turn-in generators to provide a description of item(s)
on a turn-in document for which local stock numbers are listed. DOD also
noted that bringing unused items back into DLA supply stock would negate
warehousing and distribution savings achieved through using prime vendor
direct shipments to DOD customers. In addition, DOD stated that assigning
NSNs to nonstocked commercial items would significantly increase item
costs and run counter to the Federal Acquisition Streamlining Act of
199450 preference for commercial purchases. As discussed in our report,
DOD already has efforts underway to promote the use of unique product
identifiers other than NSNs by commercial vendors and small business
firms. DOD's efforts include cost benefit considerations. Consistent with
DOD's efforts, it is important that DLA prime vendor purchase transactions
are identified to NSNs or other unique product identification to
facilitate economies through (1) volume purchasing and (2) reutilization
of excess items.

With regard to our recommendation that DRMS develop written guidance and
formal training on the proper assignment of condition codes to excess
property turn-ins, DOD stated that the military services currently receive
formal blocks of training and are in the better position to assign the
condition codes. DOD also referred to current DOD and DRMS guidance on
condition codes. In addition, DOD stated that DRMS will review current
guidance to ensure the appropriate assignment of responsibilities
regarding the establishment and use of condition codes. As discussed in
our report, our statistical tests, DRMO screening visits, case study
acquisitions of excess DOD commodity items, and interviews of DRMO,
military service, and GSA officials all indicate that significant problems
exist with the reliability of excess property condition codes. We
determined that unreliable condition codes were caused by a lack of
detailed guidance and a failure to follow existing guidance. For example,
as noted in our report,

50 Pub. L. No. 103-355, S: 8104, 108 Stat. 3243, 3390 (Oct. 13, 1994)
(codified at 10 U.S.C. 2377).

military services often coded items as unserviceable when they no longer
had a need for them, even though the items were in new, unused, and
excellent condition. Therefore, written guidance and training on the
proper assignment of condition codes also is important to correcting this
problem to assure that existing misconceptions are corrected and would be
responsive to our recommendation.

With regard to our recommendation that DRMS periodically inspect
liquidation contractor facilities and take immediate action to correct
structural impairments and other deficiencies, such as storage capacity,
DOD stated that an inspection of all liquidation contractor facilities has
been completed and periodic inspections will continue. DOD also stated
that the only facility requiring immediate structural repair is the
Norfolk, Virginia, facility and that DRMS has issued a work order for the
necessary repairs. DOD also stated that additional storage options are
being regularly evaluated by the contractor and DRMS. As stated in our
report, the overflow of excess property at the Huntsville liquidation
sales location was a long-term, uncorrected problem, which resulted in a
significant breakdown in accountability and physical inventory control
over excess property. It is important that timely and appropriate
solutions be identified and implemented to prevent this problem in the
future. The actions that DOD highlighted in its letter are responsive to
our recommendation.

Finally, DOD stated that actions have already been taken to respond to our
recommendation that DRMS consider available options and implement an
interim process for identifying turn-ins of excess new, unused, and
excellent condition items that could be reutilized to avoid unnecessary
purchases in the existing systems environment. DOD enumerated initiatives
implemented during 2004 and early 2005 that improve the visibility of
excess property listed on DRMS's Web page. In addition, DOD stated that
DRMS will work with DLA item managers on the best methodology to provide
visibility of A-condition excess property. Notwithstanding the
improvements in DRMS's Web page, the overall commodity purchasing process
has not changed, and DLA continues to make commodity purchases without
considering the availability of identical A-condition excess commodities.
Achieving the economy and efficiency contemplated by federal regulations
and DOD policy is dependent upon identifying continuing commodity
purchases and having the ability to match these items to A-condition
excess property and hold it for reutilization. DOD should not dispose of
excess A-condition excess items that it continues to purchase.

               DOD's comment letter is reprinted in appendix II.

As agreed with your offices, unless you announce its contents earlier, we
will not distribute this report until 30 days from its date. At that time,
we
will send copies to interested congressional committees; the Secretary of
Defense; the Deputy Under Secretary of Defense for Logistics and Materiel
Readiness; the Secretary of the Army; the Secretary of the Navy; the
Secretary of the Air Force; the Director of the Defense Logistics Agency;
the Commander of the Defense Reutilization and Marketing Service; and
the Director of the Office of Management and Budget. We will make copies
available to others upon request. In addition, this report will be
available at
no charge on the GAO Web site at http://www.gao.gov.

Please contact Gregory D. Kutz at (202) 512-9505 or [email protected], John
Ryan at (202) 512-9587 or [email protected], or Gayle L. Fischer at (202) 512
9577 or [email protected] if you or your staff have any questions
concerning this report. Additional contacts and major contributors to this
report are provided in appendix VI.

Gregory D. Kutz
Managing Director
Forensic Audits and Special Investigations

Appendix I

                       Objectives, Scope, and Methodology

The purpose of our audit was to assess the economy and efficiency of the
Department of Defense (DOD) excess property program. In doing so, we
assessed the effectiveness of systems, processes, and controls for
assuring a strong reutilization program. Where we found controls to be
ineffective, we tested them further to determine (1) the magnitude and (2)
root causes of associated waste and inefficiency. Our audit and
investigation focused on Defense Logistics Agency (DLA) purchases of
consumable items and Defense Reutilization and Marketing Service (DRMS)1
excess property inventory activity during fiscal years 2002 and 2003, the
most current fiscal years for which data were available at the time we
initiated our audit. To illustrate continuing problems, we obtained excess
DOD commodity items in new, unused, and excellent condition (A condition)
during fiscal year 2004 and the first quarter of fiscal year 2005 that
were in use by the military services, were being purchased by DLA, or both
at the time they were available for reutilization.

We obtained access to the following systems and databases to support our
audit and investigation.

o 	The DRMS Automated Information System (DAISY), which is an automated
inventory accounting management data system designed to process excess DOD
property from receipt to final disposal.

o 	The DRMS Management Information Distribution and Access System (MIDAS),
which contains historical (archive) DAISY information.

o 	DLA's DOD Activity Address Directory (DODAAD), which contains
information to identify agency names and addresses for activity codes that
are associated with excess property requisitions.

o 	The Government Liquidation, LLC2 database, which contains transactions
on public sales of excess DOD property items.

o 	DLA's Standard Automated Materiel Management System (SAMMS), which
contains transaction data on purchases by commodity group.

1 DRMS is responsible for the disposal of excess property received from
the military services and other DOD agencies.

2 Government Liquidation, LLC is the DRMS commercial venture partner
(contractor) for public sales of excess DOD property.

Appendix I
Objectives, Scope, and Methodology

o 	The Federal Logistics Information System (FEDLOG), which is a logistics
information system managed by the Defense Logistics Information Service
(DLIS)3 within DLA. This system contains detailed information on
specifications, use, acquisition cost, and sources of supply for national
stock numbered items, including more than 7 million stock numbers and more
than 12 million part numbers.

We obtained online access to DAISY, MIDAS, DODAAD, and FEDLOG, and we
obtained copies of the SAMMS databases for fiscal years 2002 and 2003 and
Government Liquidation, LLC databases for June 2001 through December 2004.
For each of the DOD systems and databases used in our work, we (1)
obtained information from the system owner/manager on their data
reliability procedures; (2) reviewed systems documentation; (3) reviewed
related DOD Inspector General reports, DLA Comptroller budget data, and
independent public accounting firm reports related to these data; and (4)
performed electronic testing of commodity purchase and excess inventory
databases to identify obvious errors in accuracy and completeness. We
verified database control totals, where appropriate. We also received
FEDLOG training from the DLIS service provider. When we found obvious
discrepancies, such as omitted national stock number (NSN)4 data in the
DLA commodity purchases databases and transaction condition coding errors
in the DRMS excess property systems data, we brought them to the attention
of agency management for corrective action. We made appropriate
adjustments to transaction data used in our analysis, and we disclosed
data limitations with respect to condition coding errors and the omission
of NSN data that affected our analysis. Our data analysis covered
commodity purchases and excess commodity turn-ins and disposal activity
during fiscal years 2002 and 2003. In addition, we statistically tested
the accuracy of excess inventory transactions at five Defense
Reutilization and Marketing Offices (DRMO) and five DLA supply depots. We
also reviewed summary data and selected reports on DRMS compliance reviews
of 91 DRMOs during fiscal year 2004 to determine the extent to which DRMS
had identified problems with adherence to DOD and

3 DLIS manages the Federal Catalog System, which includes nearly 7 million
active supply items and operates the Federal Logistics Information System,
which contains information on national stock numbers, part numbers,
prices, packaging and shipping, and disposal instructions.

4 An NSN is a 13-digit number that identifies standard use inventory
items. The first 4 digits of the NSN represent the Federal Supply
Classification, such as 8430 for men's footwear, followed by a 2-digit
NATO code and a 7-digit designation for a specific type of boot, such as
cold weather boot.

                                   Appendix I
                       Objectives, Scope, and Methodology

DRMS policies, made recommendations for corrective actions, and monitored
DRMO actions to address its recommendations. Based on these procedures, we
are confident that that the DOD data were sufficiently reliable for the
purposes of our analysis and findings.

  Magnitude of Excess Property Reutilization Program Waste and Inefficiency

Analysis of the Extent of DOD Reutilization

To determine the overall magnitude of waste and inefficiency related to
the DOD excess property reutilization program, we identified fiscal year
2002 and 2003 excess commodity disposal activity by property condition
code and examined the extent of DOD reutilization of excess items in new,
unused, and excellent condition (A-condition) versus transfers, donations,
public sales, and other disposals outside of DOD through scrap,
demilitarization, and hazardous materials contractors. We also compared
DLA commodity purchase transactions to identical excess new, unused, and
excellent condition items to identify instances where DLA purchased
commodity items rather than reutilizing these excess items. We used NSN
data as the basis for identifying identical items. In addition, we
analyzed DLA supply depot excess commodity turn-ins to determine the
extent to which new, unused DLA supply depot inventory accounted for
turn-ins of excess of A-condition items. We used IDEA audit software5 to
facilitate our analysis.

To determine the extent to which DOD reutilized excess commodities in A
condition during fiscal years 2002 and 2003, we used online access to the
DRMS MIDAS database of historical transactions and performed data mining6
and analysis of the universe of excess commodity turn-in and disposal
transactions. We identified key data elements, such as disposal
transaction types, the excess property recipient DOD Activity Address Code
(DODAAC), and condition codes. We used these data elements to identify the
extent of DOD reutilization of excess A-condition commodities compared to
transfers; donations; public sales; and disposals of scrap, hazardous
materials, and demilitarized items. We determined the type of disposal
transaction through analysis of the DODAAC that identifies the

5 Interactive Data Extraction and Analysis software developed by CaseWare
International, Inc., and distributed by Audimation, Inc., Houston, Texas,
CaseWare's U.S. business partner.

6 Data mining involved queries of DLA's commodity purchase databases and
DRMS excess inventory system to identify patterns of activity, such as
turn-ins and disposals of Acondition excess commodities; reutilization,
transfers, donations, sales, and destruction of excess items; and items
that were being purchased when identical new, unused, and excellent
condition items were available for reutilization.

                                   Appendix I
                       Objectives, Scope, and Methodology

name and address of the agency or program that received (or requisitioned)
the property. Because DOD considers special program7 reutilization the
same as DOD reutilization, we used DODAACs to separately identify
reutilization transactions for special programs that were not directly
associated with DOD activities. We also used DODAAC information to
determine the identity of turn-in generators and requisitioners of excess
DOD commodities for subsequent interviews of generators regarding why new,
unused items were excessed and excess property users about their
experience.

Analysis of Other Types of We also worked with DRMS officials to obtain
information on transaction Excess Property Disposals codes for identifying
disposals of hazardous materials, scrap, and

                  Analysis of Commodity Purchases Transactions

demilitarized items. We independently performed data mining and analysis,
and we verified the results of our queries with DRMS officials in order to
provide reasonable assurance that our data-mining approach and results
were accurate. We used the Government Liquidation, LLC database to
determine the acquisition value of commodity items sold and sale revenues
during fiscal years 2002 and 2003.

We used the six SAMMS commodity purchases databases we obtained to
identify key information on commodity items that military units purchased
from DLA, including the item description or name, NSN, purchase date, unit
price, unit acquisition cost, and full cost including the DLA user fee.
The six commodity groups we audited included (1) construction and land and
maritime weapons, (2) electrical, (3) general, (4) industrial, (5)
medical, and (6) textile. We worked with DLA officials to identify items
to a commodity group based on the supply class number included in the NSN
or local stock number (LSN).8

To determine the extent to which DLA made unnecessary purchases of new
items when identical items that were reported to be in A condition were
available for reutilization, we compared commodity purchase transactions
in SAMMS to excess property turn-in transactions in MIDAS. We used NSNs to
identify instances where the military services ordered and

7 Special programs, such as the Humanitarian Assistance Program and law
enforcement agencies, are listed and described in app. IV.

8 An LSN consists of the four-digit federal supply classification number,
a two-digit NATO code, and up to a seven-character description, such as
"monitor" for a computer monitor and "boots" for cold weather boots.

                                   Appendix I
                       Objectives, Scope, and Methodology

purchased items from DLA at the same time identical items that were
reported to be in new or excellent condition were available for
reutilization. Although we identified at least $400 million in fiscal year
2002 and 2003 wasteful purchases related to A-condition excess items that
were available for reutilization, we were unable to determine the full
magnitude of this problem due to inconsistent recording of NSNs and
improper downgrading of condition codes.

Case Study Examples	We performed case study investigations of excess
commodity turn-ins and disposals during fiscal years 2002 through 2003. In
addition, to illustrate that DRMS reutilization program waste and
inefficiency are continuing problems, during fiscal year 2004 and the
first quarter of fiscal year 2005, we obtained several excess DOD
commodity items that were currently in use, were being purchased at the
time we acquired them, or both. We used data mining and analysis to
identify commodity items for our case study acquisitions. To identify new
and unused excess DOD commodity items that were available for requisition
at no cost, we accessed the DRMS Reutilization, Transfer, and Donation Web
page and identified excess DOD commodity items available to federal
agencies. We confirmed that these items were available to federal agencies
by also accessing the General Services Administration's (GSA) GSAXcess Web
page. We used GAO's federal agency DODAAC to requisition new and unused
excess DOD commodity items in A condition. We submitted our requisitions
for transfer of these excess DOD items through GSA. To identify new and
unused items that we could purchase at minimal cost, we accessed
govliquidation.com. We also accessed govliquidation.com to identify
continuing sales of our case study items.

We based our case study selections on commodities used by military units
and the quantity and dollar amount of purchases and excess property
turnins associated with these items. After we identified each new and
unused case study item that we wanted to purchase, we queried FEDLOG to
confirm the acquisition cost and current use of the item-that is, whether
an item was still being purchased or currently in use but being phased out
or was obsolete. For further assurance on the status of the excess
commodities that we targeted for acquisition, we contacted the DLA item
managers responsible for these items to confirm that they were currently
being purchased, were in use by the military services, or both. We also
contacted item managers to obtain information on how certain items, such
as circuit cards and power supply units, were used.

                                   Appendix I
                       Objectives, Scope, and Methodology

  Causes of Reutilization Program Waste and Inefficiency

To determine the root causes of identified inefficiencies, we first gained
an understanding of the processes for acquisition and disposal of DOD
commodities. We reviewed applicable laws and regulations and DOD, military
service, DLA, and DRMS policies and procedures. We also reviewed the DRMS
contracts for DRMO property warehouse services and liquidation sales for
consistency with DOD policies. In addition, we reviewed SAMMS and MIDAS
system manuals. We met with and contacted numerous DLA and DRMS officials
and obtained documentation to assess how the property reutilization
program is monitored for effectiveness. We also met with or contacted DOD
and Army, Navy, and Air Force officials about their experience with
commodity acquisitions, reutilization, and disposals. We interviewed DLA
item managers and buyers to obtain information on their roles and
responsibilities and key systems and controls involved in the commodity
acquisition and management process. We also obtained information on how
decisions are made about whether to purchase new items or to reutilize
excess items through DOD's reutilization program. We made visits to 12
DRMOs to observe excess property processing, screen for excess case study
items, investigate the disposition of excess property turn-ins, or test
the accuracy of excess property inventory. We also visited five
DLA-managed Defense depots to test inventory accuracy and observe excess
property disposal processes. In addition, we visited 10 Government
Liquidation, LLC sales locations.

We focused our assessment of the causes of reutilization program waste and
inefficiency on key aspects of the overall management control environment,
including (1) data reliability, (2) physical inventory control, and (3)
the current systems environment. We used GAO's Standards for Internal
Control in the Federal Government9 as criteria for identifying internal
control breakdowns that contributed to waste and inefficiency.

9 GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999). This document was
prepared to fulfill GAO's statutory requirement under 31 U.S.C. S: 3512
(c), (d), commonly known as the Federal Managers' Financial Integrity Act
of 1982, to issue standards that provide the overall framework for
establishing and maintaining internal control and for identifying and
addressing major performance and management challenges and areas at
greatest risk of fraud, waste, abuse, and mismanagement.

                                   Appendix I
                       Objectives, Scope, and Methodology

Data Reliability 	We statistically tested10 the accuracy of current excess
commodity inventory transaction data at five DRMO warehouse locations and
five DLA supply depot locations. Each location was a separate population
of randomly selected transactions. We randomly selected transactions from
the population of current inventory transactions at each of the test
locations. The five DRMO locations we tested were the Columbus DRMO in
Ohio; the Stockton DRMO in French Camp, California; the Hill DRMO at Hill
Air Force Base in Ogden, Utah; and the Norfolk DRMO and the Richmond DRMO
in Virginia. Our selection of the five DRMOs was based on geographic
location, turn-in volume, types of excess items handled, and military
units generating the most turn-ins. We tested inventory at Defense depots
that were co-located or located within proximity of the above DRMOs,
including Defense depots at Columbus, Ohio; San Joaquin, California; Hill
Air Force Base, Utah; Norfolk, Virginia; and Richmond, Virginia. Each
location was a separate population, and we evaluated the results of each
sample location separately.

The purpose of our testing was to evaluate the effectiveness of controls
over existence-including timely recording of transactions, item
description (item name and NSN), and quantity-and condition coding.
Appendix V describes the specific criteria we used to conclude on the
effectiveness of DRMO and DLA supply depot controls for inventory
accuracy.

Physical Inventory Control	Our assessment of physical inventory control
focused on the results of our statistical tests discussed above and our
review of DRMS summary data on reported DRMO and DLA supply depot losses
due to lost, stolen, and damaged property. We investigated problems
associated with liquidation contractor controls for safeguarding excess
DOD property held for sale at the Huntsville, Alabama, and the Norfolk,
Virginia, sales locations. We also assessed the extent of damage to our
case study purchase of bandages and medical supply items from the Norfolk
sales location. In addition, we obtained DRMS summary reports on losses of
excess property at DRMOs and DLA supply depots for fiscal years 2002
through 2004. We referred locations with the largest reported losses to
our Office of Special Investigations for further investigation.

10 Our statistical tests were based on a random sample of the population
of excess inventory transactions at each test location, which permitted us
to estimate, or project, the errors in the population at each location.

                                   Appendix I
                       Objectives, Scope, and Methodology

Commodity Inventory Systems Environment

To gain an understanding of DLA commodity purchase and DRMS commodity
inventory systems and processes with regard to DOD's excess property
reutilization program, we reviewed DLA and DRMS policies and procedures,
and interviewed DLA, DRMS, and DRMO program and systems officials. We also
used observations and information obtained during our statistical tests,
excess property screening visits, and case study investigations. In
addition, we relied on the body of work GAO has performed in this area.11

To determine the scope and status of DLA and DRMS systems efforts to
improve the reutilization process in the future, we interviewed DLA and
DRMS systems officials who are responsible for DLA's Business Systems
Modernization (BSM) and Integrated Data Environment (IDE) and the DRMS
Reutilization Modernization Program (RMP).12 We also reviewed business
systems modernization plans and related documents to determine the current
status, implementation time frames, and scope of planned improvements. In
addition, we obtained and reviewed the Reutilization Management Program
Functional Requirements Document, the RMP Decision Matrix, and
implementation timelines. We focused our assessment on whether the systems
modernization efforts, as currently documented, would adequately address
needed improvements in excess property reutilization program economy and
efficiency.

We conducted our work from November 2003 through February 2005 in
accordance with U.S. generally accepted government auditing standards. We
performed our investigative work in accordance with standards prescribed
by the President's Council on Integrity and Efficiency.

11 GAO, DOD Management: Examples of Inefficient and Ineffective Business
Processes, GAO-02-873T (Washington, D.C.: June 25, 2002), and DOD Business
Systems Modernization: Billions Continue to Be Invested with Inadequate
Management Oversight and Accountability, GAO-04-615 (Washington, D.C.: May
27, 2004).

12 BSM is intended to replace DLA's SAMMS, and IDE may be selected to
provide a means of interfacing with, or sharing information between, DLA
systems. RMP is the planned upgrade for DRMS's DAISY and MIDAS.

                                  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 II
Comments from the Department of Defense

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 II
Comments from the Department of Defense

Appendix III

                        Excess Property Condition Codes

DOD's condition code is a two-digit alphanumeric code used to denote the
condition of excess property from the supply and the disposal perspective.
The DOD supply condition code is the alpha character in the first position
and shows the condition of property in the DLA depot inventory, or is
assigned by the unit turning in the excess property. The GSA disposal
condition code, in the second position, shows whether the property is in
new, used, or repairable condition, salvageable, or should be scrapped.
(See table 7.)

Table 7: DOD Excess Property Condition Codes DOD codes DOD supply condition code
                          GSA disposal condition code

A1, A4

B1, B4

C1, C4

                                   D1, D4, D7

Serviceable property

A - Issuable without qualification - New, used, repaired or reconditioned
property that is issuable without restriction, including material with a
shelf life of more than 6 months.

B -Issuable with qualification - New, used, repaired, or reconditioned
property that is issuable, but is restricted from issue to specific units,
activities, or geographical areas by reason of its limited usefulness or
short service life expectancy, including materials with a shelf life of 3
through 6 months.

C -Priority issue - Property is issuable to selected customers but must be
issued before Condition A and B material to avoid loss as a usable asset,
including materials with less than 3-months' shelf life.

D -Test/Modification required - Property is in serviceable condition but
requires test, alteration, modification, or conversion or disassembly.

1 - Excellent - Property is in new or unused condition and can be used
immediately without repairs.

4 - Usable - Property shows some wear, but can be used without significant
repair.

7 - Repairable - Property is unusable in its current condition, but can be
economically repaired.

E7 F7 G7 H7 Unserviceable property

E -Limited restoration required - Property requires only a limited expense
or effort to restore to serviceable condition.

F - Reparable - Property is economically reparable but requires repairs,
overhaul, or reconditioning to make it serviceable property.

G - Incomplete - Property requires additional parts or materials to
complete the item prior to issue.

H -Condemned - Property has been determined to be unserviceable and does
not meet repair criteria, including items whose shelf life has expired and
cannot be extended.

7 - Repairable - Property is unusable in its current condition, but can be
economically repaired.

                                  Appendix III
                        Excess Property Condition Codes

                         (Continued From Previous Page)

DOD codes DOD supply condition code GSA disposal condition code

                        Salvage property         
    FX, GX, HX                                      X -Salvage - Property has 
                                                                     value in 
(VX-Salvaged F - Reparable; G - Incomplete; H excess of its basic material 
                          - Condemned                            content, but 
     military                                    repair is impractical and/or 
                                                                uneconomical. 
    munitions)                                   

Scrap property

FS, GS, HS F - Reparable; G - Incomplete; H - Condemned 	S -Scrap -
Property has no value except for its basic material content.

Source: DAISY C-A-T (Codes and Terms) reference guide (11th ed. 2003) and
DRMS-I 4160.14, vol. IV, Supp. 1, "Codes Index" (November 2004).

Appendix IV

Programs Authorized to Receive Excess DOD Property

Table 8 lists the DOD special programs that are authorized to receive
excess property. In addition to DOD special programs, under the
Stevenson-Wydler Technology Innovation Act of 1980, as amended,1 DOD makes
computer equipment available to schools under the federal government's
Computers for Learning Program following the DOD and special program
screening period and prior to the federal agency screening period. In
accordance with 15 U.S.C. S: 3710(i), the director of a laboratory or the
head of any federal agency or department may loan, lease, or give research
equipment that is excess to the needs of the laboratory, agency, or
department to an educational institution or nonprofit organization for the
conduct of technical and scientific education and research activities.

                         Table 8: DOD Special Programs

Humanitarian Assistance 10 U.S.C. S: 2557 authorizes the Secretary of
Defense to make available nonlethal excess DOD supply

Program (HAP)	items for humanitarian relief purposes, and 10 U.S.C. S:
2561 authorizes the Secretary of Defense to use DOD's Humanitarian
Assistance appropriations to transport supply items to needy countries.

Law enforcement agencies 10 U.S.C. S: 2576a authorizes the Secretary of
Defense to transfer excess DOD property that is suitable for

(LEA)	use by LEAs to federal and state agencies, including counter-drug
and counter-terrorism activities. Recipients pay for transporting the
property.

Museums	10 U.S.C. S: 2572 authorizes the Secretary of Defense to loan,
gift, or exchange documents, historical artifacts, and condemned or
obsolete combat materiel to a municipal corporation, county, or other
political subdivision of a state; a servicemen's monument association; a
museum, historical society, or historical institution of a state or
foreign nation or nonprofit military aviation heritage foundation or
association; or a post of the Veterans of Foreign Wars of the United
States, the American Legion, or other recognized war veterans'
association.

National Guard units	National Guard units are designated by DOD to receive
excess DOD property with the approval of the National Guard Bureau or the
U.S. Property and Fiscal Officer, or their authorized representative, for
the state in which the National Guard unit is located.

Senior Reserve Officer Training Corps units (ROTC) ROTC units are
designated by DOD to receive excess DOD property to support supplemental
proficiency training programs with approval of the cognizant installation
commander or designee. Junior ROTC units are not covered. Morale, welfare,
and recreation activities and services (MWR) MWR activities are authorized
by DOD to receive excess DOD property through their servicing accountable
officer. Military Affiliate Radio System (MARS) MARS operates under the
command jurisdiction of the military services and is an integral part of
the DOD communications system. DOD has authorized the military services to
requisition excess DOD property from DRMOs.

1 Pub. L. No. 96-480, 94 Stat. 2311 (Oct. 21, 1980), as amended (15 U.S.C.
S: 3701, et seq.); Computers for Learning Program established under the
act's authority; and Exec. Order No. 12,999, 61 Fed. Reg. 17,227 (Apr. 19,
1996).

         Appendix IV Programs Authorized to Receive Excess DOD Property

                         (Continued From Previous Page)

Civil Air Patrol (CAP)	As the official auxiliary of the U.S. Air Force,
CAP is eligible to receive excess DOD property. Title to the property is
transferred to CAP upon the condition that it be used to support valid Air
Force mission requirements.

DOD contractors	Military Standard Requisitioning and Issue Procedures
(MILSTRIP) in DOD 4000.25-1M, MILSTRIP Manual (April 2004), provide for
the military service or Defense agency management control activity to
withdraw or authorize the withdrawal of specified excess property from a
DRMO for use as government-furnished equipment to support officially
stated contractual requirements.

Foreign governments and Under the International Security Assistance and
Arms Export Control Act of 1976 (Pub. L. No. 94-329, as

international organizations	amended, codified at 22 U.S.C. S: 2751, et
seq.), certain excess defense articles may be made available to eligible
foreign countries and international organizations designated by the
Department of State and DOD. Excess DOD property may also be available to
eligible foreign countries and international organizations as foreign
military sales under authority of the Foreign Assistance Act of 1961, as
amended, codified at 22 U.S.C. S: 2151, et seq.

                             Source: GAO analysis.

Appendix V

Results of Statistical Tests of Excess Commodity Inventory Accuracy

To evaluate the effectiveness of controls for assuring the accuracy of
excess commodity inventory data, we tested current inventory transactions
at five DRMO locations and five DLA supply depot locations. Our tests
covered controls over physical existence, item description (item name and
NSN), quantity, and condition code.1 DRMO inventory locations tested were
the Columbus DRMO in Columbus, Ohio; the Stockton DRMO in French Camp,
California; the Hill DRMO at Hill Air Force Base, in Ogden, Utah; the
Norfolk DRMO in Norfolk, Virginia; and the Richmond DRMO in Richmond,
Virginia. For efficiency, we tested inventory at five DLA supply depots
that were co-located or located within proximity of the above DRMOs,
including the depots in Columbus, Ohio; San Joaquin County, California;
Hill Air Force Base, Utah; Norfolk, Virginia; and Richmond, Virginia. Each
location was a separate population, and we evaluated the results of each
sample location separately.

We drew our statistical samples from the universe of excess property
transactions in current DRMS DAISY inventory, which includes excess
property warehoused at DRMOs and DLA supply depots. We stratified our
samples by the two major categories of condition code-serviceable and
unserviceable-in order to determine whether errors were more prevalent in
one category. From the population of current excess DOD inventory at the
time of our testing visit, we selected stratified random probability
samples of excess property turn-in transactions for each of the five DRMO
and each of the five DLA supply depot case study locations. With these
statistically valid samples, each transaction in the population for the 10
case study locations had a nonzero probability of being included, and that
probability could be computed for any transaction. Each sample transaction
for a test location was subsequently weighted in our analysis to account
statistically for all the transactions in the population for that
location, including those that were not selected. Our test results relate
to the populations of transactions at the respective DRMO and DLA supply
depot locations, and the results cannot be projected to the population of
excess property transactions or the DRMOs or DLA supply depots as a whole.

We present the results of our statistical samples for each population as
(1) our projection of the estimated error overall and for each control
attribute as point estimates and the two-sided 95 percent confidence
intervals for the failure rates and (2) our assessments of the
effectiveness

1 A list of condition codes and definitions is included in app. III.

                                   Appendix V
                     Results of Statistical Tests of Excess
                          Commodity Inventory Accuracy

of the controls and the relevant lower and upper bounds of a one-sided 95
percent confidence interval for the failure rate. If the one-sided upper
bound is 5 percent or less, then the control is considered effective. If
the one-sided lower bound is greater than 5 percent, then the control is
considered ineffective. Otherwise, we say that there is not enough
evidence to assert either effectiveness or ineffectiveness. All
percentages are rounded to the nearest percentage point.

  Overall Results of Inventory Reliability Tests

Tables 9 and 10 present the overall results of our statistical tests of
inventory accuracy at the five DRMOs and the five DLA supply depots that
we tested. The overall results show that controls for assuring the
accuracy of excess property inventory were ineffective at four of the five
DRMOs and three of the five DLA supply depots that we tested. We tested
physical existence, including whether turn-ins recorded in inventory could
be physically located and whether inventory changes were recorded within 7
days. We also tested the accuracy of item descriptions (item name(s) and
NSN(s)), recorded quantities, and condition code categories.

Table 9: DRMO Turn-in Transactions with One or More Control Test Failures

                                                                Assessment of 
                                                    effectiveness of controls 
                          Estimated failure rate      (and relevant bounds of 
                           (95 percent two-sided         95 percent one-sided 
           DRMO tested      confidence interval)        confidence intervals) 

                 Richmond                   25%                   Ineffective 
                                   (17% to 33%)             Lower bound = 18% 
                 Stockton                   12%                   Ineffective 
                                    (7% to 18%)              Lower bound = 8% 
                     Hill                    8%           Not enough evidence 
                                    (4% to 14%)              Lower bound = 5% 
                                                         or upper bound = 13% 
                  Norfolk                   18%                   Ineffective 
                                   (12% to 25%)             Lower bound = 13% 
                 Columbus                   47%                   Ineffective 
                                   (37% to 56%)             Lower bound = 39% 

Source: GAO.

Note: Although some transactions included more than one type of error, we
only counted one failure for a transaction.

Appendix V
Results of Statistical Tests of Excess
Commodity Inventory Accuracy

Table 10: DLA Supply Depot Turn-in Transactions with One or More Control
Test Failures

                                DLA depot tested

            Estimated failure rate (95 percent two-sided confidence interval)

Assessment of effectiveness of controls

(and relevant bounds of 95 percent one-sided confidence intervals)

Richmond 8% (4% to 13%)

                    Not enough evidence Lower bound = 5% or upper bound = 12%

                 San Joaquin                  16%                 Ineffective 
                                     (11% to 23%)           Lower bound = 12% 
                        Hill                   6%         Not enough evidence 
                                      (3% to 10%)            Lower bound = 3% 
                                                          or upper bound = 9% 
                     Norfolk                  14%                 Ineffective 
                                      (9% to 19%)           Lower bound = 10% 
                   Columbusa                  12%                 Ineffective 
                                      (8% to 18%)            Lower bound = 9% 

Source: GAO.

aMost of the errors in our Columbus supply depot sample related to
quantity errors for items such as machine screws, washers, and other small
hardware items. Therefore, we did not consider these problems to be
significant.

Because most of the errors we found related to the accuracy of condition
codes, we separately estimated the error rates for this control attribute.
A turn-in transaction was considered a failure if the serviceable or
unserviceable condition code assigned to the item(s) was not accurate
based on our physical observation and judgment. DLA and DRMO officials who
accompanied us during our testing provided their perspectives, which we
considered in our conclusions. We based our conclusions on obvious
differences between the condition code assigned to the item and the
appearance of the item. For example, some items were in the original
manufacturer packaging and other items were obviously used, dirty, or
worn. If we were unsure of the condition of an item, we accepted the
condition code assigned by the military unit turn-in generator or the DLA
supply depot. In addition, we did not question the assigned condition
codes of technical equipment items such as electronic parts and scientific
equipment. Tables 11 through 13 show the results of our condition code
reliability tests for turn-in transactions at the five DRMOs that were
coded as being in serviceable and unserviceable condition.

Appendix V
Results of Statistical Tests of Excess
Commodity Inventory Accuracy

Table 11: DRMO Turn-in Transactions That Failed Overall Control Tests for
Condition Code Accuracy

                                                                Assessment of 
                                                    effectiveness of controls 
                          Estimated failure rate      (and relevant bounds of 
                           (95 percent two-sided         95 percent one-sided 
           DRMO tested      confidence interval)        confidence intervals) 

                    Richmond                  22%                 Ineffective 
                                     (15% to 31%)           Lower bound = 16% 
                    Stockton                   8%         Not enough evidence 
                                      (4% to 13%)            Lower bound = 5% 
                                                         or upper bound = 12% 
                        Hill                   5%         Not enough evidence 
                                      (2% to 11%)            Lower bound = 3% 
                                                         or upper bound = 10% 
                     Norfolk                  13%                 Ineffective 
                                      (8% to 19%)            Lower bound = 9% 
                    Columbus                  22%                 Ineffective 
                                     (14% to 33%)           Lower bound = 15% 
                Source: GAO.                      

Table 12: DRMO Turn-in Transactions Classified as Serviceable That Failed
Control Tests for Condition Code Accuracy

                                                                Assessment of 
                                                    effectiveness of controls 
                          Estimated failure rate      (and relevant bounds of 
                           (95 percent two-sided         95 percent one-sided 
           DRMO tested      confidence interval)        confidence intervals) 

                  Richmond                   0%                     Effective 
                                     (0% to 3%)              Upper bound = 3% 
                  Stockton                   1%           Not enough evidence 
                                     (0% to 6%)              Lower bound = 0% 
                                                          or upper bound = 5% 
                      Hill                   2%           Not enough evidence 
                                     (0% to 7%)              Lower bound = 0% 
                                                          or upper bound = 6% 
                   Norfolk                   5%           Not enough evidence 
                                    (2% to 12%)              Lower bound = 2% 
                                                         or upper bound = 11% 
                  Columbus                   1%                     Effective 
                                     (0% to 6%)              Upper bound = 5% 

Source: GAO.

Appendix V
Results of Statistical Tests of Excess
Commodity Inventory Accuracy

As shown in table 13, we found significant problems with the accuracy of
unserviceable condition codes for excess commodities at four of the five
DRMOs we tested.

Table 13: DRMO Turn-in Transactions Classified as Unserviceable That
Failed Control Tests for Condition Code Accuracy

                                                                Assessment of 
                                                    effectiveness of controls 
                          Estimated failure rate      (and relevant bounds of 
                           (95 percent two-sided         95 percent one-sided 
           DRMO tested      confidence interval)        confidence intervals) 

                 Richmond                   26%                   Ineffective 
                                   (18% to 36%)             Lower bound = 19% 
                 Stockton                   10%                   Ineffective 
                                    (5% to 17%)              Lower bound = 5% 
                     Hill                    6%           Not enough evidence 
                                    (2% to 13%)              Lower bound = 3% 
                                                         or upper bound = 12% 
                  Norfolk                   17%                   Ineffective 
                                   (10% to 26%)             Lower bound = 11% 
                 Columbus                   23%                   Ineffective 
                                   (14% to 34%)             Lower bound = 15% 

Source: GAO.

As shown in table 14, we found condition codes to be reliable at the five
DLA supply depots that we tested.

Appendix V
Results of Statistical Tests of Excess
Commodity Inventory Accuracy

Table 14: DLA Supply Depot Turn-in Transactions That Failed Overall
Control Tests for Condition Code Accuracy

Assessment of effectiveness of controls

(and relevant bounds of 95 percent one-sided confidence intervals)

            Estimated failure rate (95 percent two-sided confidence interval)

                                DLA depot tested

Richmond

Effective Lower bound = 0% Upper bound = 2%

0% (0% to 2%)

                  San Joaquin                  0%                   Effective 
                                       (0% to 2%)            Lower bound = 0% 
                                                             Upper bound = 2% 
                         Hill                  0%                   Effective 
                                       (0% to 3%)            Lower bound = 0% 
                                                          or upper bound = 2% 
                      Norfolk                  1%                   Effective 
                                       (0% to 3%)            Lower bound = 0% 
                                                          or upper bound = 2% 
                     Columbus                  0%                   Effective 
                                       (0% to 2%)            Lower bound = 0% 
                                                          or upper bound = 2% 
                 Source: GAO.                     

Appendix VI

                     GAO Contacts and Staff Acknowledgments

GAO Contacts	Stephen P. Donahue, (202) 512-2772 Richard C. Newbold, (202)
512-7437

Acknowledgments	Staff making key contributions to this report include
Beatrice Alff, Mario Artesiano, James D. Ashley, Cindy Barnes, Gary
Bianchi, Erik Braun, Matthew S. Brown, Randall J. Cole, Tracey L. Collins,
Francine DelVecchio, Lauren S. Fassler, Michele Fejfar, Gloria
Hernandezsaunders, Wilfred B. Holloway, Jason Kelly, Barbara C. Lewis,
Kristen Plungas, and Ramon Rodriguez.

Technical expertise was provided by Sushil K. Sharma, PhD, DrPH, and Keith
A. Rhodes, Chief Technologist.

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