DOD Excess Property: Management Control Breakdowns Result in
Substantial Waste and Inefficiency (07-JUN-05, GAO-05-729T).
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-05-729T
ACCNO: A25959
TITLE: DOD Excess Property: Management Control Breakdowns Result
in Substantial Waste and Inefficiency
DATE: 06/07/2005
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
Joint Service Lightweight Integrated
Suit Technology Program
Joint Services Nuclear, Biological, and
Chemical Equipment Assessment Program
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GAO-05-729T
United States Government Accountability Office
GAO Testimony
Before the Subcommittee on National Security, Emerging Threats and
International Relations, Committee on Government Reform, House of
Representatives
For Release on Delivery Expected at 2:00 p.m. Tuesday, June 7, 2005
DOD EXCESS PROPERTY
Management Control Breakdowns Result in Substantial Waste and Inefficiency
Statement of Gregory D. Kutz
Managing Director
Forensic Audits and Special Investigations
A
GAO-05-729T
[IMG]
June 7, 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 $33 billion in
excess commodity disposals in fiscal years 2002 through 2004, $4 billion
were reported to be in new, unused, and excellent condition. DOD units
reutilized only $495 million (12 percent) of these items. The remaining
$3.5 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 fiscal year 2002 and 2003 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 $3.5 Billion in Fiscal Year 2002-2004
Disposals of Excess DOD Commodities Reported To Be in New, Unused, and
Excellent Condition
Fiscal years 2002-2004
12% $495 million DOD reutilization
88% $3.5 billion
9% $363 million DOD special programs ($138 million) Federal agency
transfers ($145 million) Donations to states ($80 million)
28% $1.1 billion Demilitarization, scrap, and hazardous material disposals
51% $2 billion DOD reutilization Public sales
Other disposals Source: GAO analysis.
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 $2,898, including tax and shipping cost, for these items, which
had an original DOD acquisition cost of $79,649.
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
Mr. Chairman and Members of the Subcommittee:
Thank you for the opportunity to discuss the results of our audit and
investigation of the economy and efficiency of the Department of Defense
(DOD) program for reutilization (reuse) of excess property. Our related
report,1 released today and developed at the request of this Subcommittee,
Senator Collins, and Representative Schakowsky, describes significant
breakdowns in management controls that have resulted in substantial waste
and inefficiency in DOD's excess property reutilization program. Our
previous, limited work identified several examples of waste and
inefficiency in DOD's excess property reutilization program. Our November
2003 report2 identified several examples that showed that at the same time
DOD excessed biological laboratory 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 June 2002, we testified3
that the lack of asset visibility over the Joint Service Lightweight
Integrated Suit Technology (JSLIST)4 resulted in DOD selling new, unused
JSLIST for $3 per suit (coats and trousers) while at the same time
procuring hundreds of thousands of JSLIST annually at a cost of over $200
per suit. You were concerned that these limited examples could indicate
systemic problems.
Our current work focused on whether and to what extent we found waste and
inefficiency in DOD's excess property reutilization program and the root
causes of any waste and inefficiency. You also asked us to determine
whether the Defense Logistics Agency (DLA) was purchasing new items when
identical items in new, unused, and excellent condition were available at
Defense Reutilization and Marketing Service (DRMS) field
1 GAO, DOD Excess Property: Management Control Breakdowns Result in
Substantial Waste and Inefficiency, GAO-05-277 (Washington, D.C.: May 13,
2005).
2 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).
3 GAO, DOD Management: Examples of Inefficient and Ineffective Business
Processes, GAO-02-873T (Washington, D.C.: June 25, 2002).
4 JSLIST is a universal, lightweight, two-piece garment (coat and
trousers) that when combined with footwear, gloves, and protective mask
and 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 impacting
the ability to perform mission tasks. JSLIST is the current model
protective suit used by the military forces.
offices (DRMO). As DOD's combat support agency, DLA has a mission to
provide best-value logistics support to America's armed forces. In
carrying out its mission, DLA manages inventory valued at about $83
billion, consisting of more than 5 million items of food, fuel, clothing
and other textiles, medical supplies, industrial use items, and spare and
repair parts supporting over 1,400 weapon systems. Within DLA, DRMS is
responsible for excess property disposals. Federal regulations5 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, Defense Materiel Disposition
Manual, 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.
In performing our work, we reviewed applicable laws and regulations; DOD
policies and procedures; and current and planned systems, processes, and
management controls. To identify potential waste and inefficiencies, we
analyzed the universe of recorded commodity purchase and disposal
transactions and compared DOD commodity purchases to disposals of
identical items in new, unused, and excellent condition (A condition). To
assure ourselves that DOD data were sufficiently reliable for the purpose
of our work, we performed a number of electronic and statistical tests of
DOD databases and excess inventory and data used in our work. We conducted
our work, including follow-up work related to this testimony, from
November 2003 through May 2005 in accordance with U.S. generally accepted
government auditing standards and investigative standards prescribed by
the President's Council on Integrity and Efficiency. We obtained DOD
comments on a draft of our report, and we briefed DOD officials on new
findings included in this testimony.
Today, my testimony will focus on (1) summarizing the results of our audit
and updating our analysis for fiscal year 2004 excess commodity disposal
activity; (2) describing additional case study acquisitions of new, unused
excess DOD commodity items from December 2004 through April 2005; and (3)
discussing management control breakdowns that contributed to reutilization
program waste and inefficiency and the results of our investigations of
selected excess property losses noted in our audit report.
5 Federal Management Regulation, 41 C.F.R. ch. 102 (2004).
Summary 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 Our analysis of DRMS excess commodity
disposal activity identified substantial waste and inefficiency related to
DOD's excess property reutilization program. For example, of the $33
billion in reported excess commodity disposals in fiscal years 2002
through 2004, $4 billion related to items in new, unused, and excellent
condition. Of the $4 billion, we determined that $3.5 billion (88 percent)
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. As discussed in our report,7 our analysis of fiscal
year 2002 and 2003 data on commodity purchases and disposal activity found
that DOD purchased at least $400 million of identical commodities instead
of reutilizing available A-condition excess items. Further, the extent of
reutilization waste and inefficiency may be greater due to incomplete and
inaccurate data that are key to identifying excess items for
reutilization. In addition, the DRMS 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.
Our monitoring of DRMS disposal activity found continuing reutilization
program waste and inefficiency. We ordered several excess DOD items at
little or no cost and purchased other items at minimal cost. Overall, we
paid $2,898 for items with a listed acquisition cost of $79,649. For
example,
o As discussed in our report, from May through October 2004, we ordered
and purchased at little or no cost several new and unused excess commodity
items that DOD continued to buy and utilize, including tents; boots; power
supplies; circuit cards; gasoline burners; and a medical instrument chest,
suction device, and medical supplies and bandages.
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 GAO-05-277.
We paid a total of $1,471, including tax, buyer's premium, and shipping
cost, for these items, which had an original DOD acquisition cost of
$68,127.
o In addition, from December 2004 through April 2005, we purchased over
the Internet several additional new, unused excess commodity items that
DOD units are continuing to purchase and utilize. These items included
military badges, medals, and insignias; Cooper Trendsetter SE automobile
tires; and military dress uniforms. Although these items had an original
DOD acquisition cost of $11,522, we paid a total of $1,427 for them,
including tax, buyer's premium, and shipping cost.
Our analysis, statistical tests of excess inventory accuracy, case
studies, and interviews showed that 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
o unreliable excess property inventory data;
o inadequate oversight, accountability, and physical control of excess
property; and
o 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 that exceeded
actual requirements resulted in the disposal of unused items due to
obsolescence and contributed indirectly to reutilization program waste and
inefficiency. Further, DOD reutilization program waste and inefficiency is
symptomatic of the inventory and supply chain management issues that have
been considered high risk by GAO since 1990.
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).
Our investigations of selected reports of losses of excess DOD commodity
items identified a pervasive lack of physical accountability over excess
inventory, which leaves DOD vulnerable to the risk of theft and fraud,
waste, and abuse. The lack of accountability makes it impossible to
complete an investigation. Specifically, the failure to verify and
accurately document transactions and events at the beginning of the
disposal process and report and investigate losses when they occur
obscures or eliminates the audit trail. Because DRMO personnel did not
always verify turn-in documentation at the time they received excess items
and recorded them in excess inventory, in many cases it is not possible to
determine whether discrepancies represent sloppy recordkeeping, the loss
or theft of excess property, or where or when the loss or theft occurred.
This lack of accountability encourages theft and fraud because there is
little likelihood of detection.
We found that DRMS investigative reports are generally inconclusive with
regard to the causes of the lost property. For example, the investigative
reports on the loss of 75 chemical and biological protective suits at the
Jackson DRMO and 20 units of body armor at the Meade DRMO each stated that
the items were recorded in inventory, placed in the DRMO warehouse, and
subsequently disappeared. According to the investigative reports, no
determination was made as to what happened to these items. Our followup
investigations on DLA supply depot reports of missing aircraft parts at
two DLA depots found that depot personnel did not aggressively research
events related to the missing items because they assumed that the missing
items related to recordkeeping errors, such as the failure to record
inventory issues.
In commenting on the recommendations in our audit report, DOD concurred
that actions are needed to improve the reutilization program and noted a
number of improvement initiatives that were taken during fiscal year 2004
and early in fiscal year 2005. While these actions have made some marginal
improvements in the reutilization program, DOD has not yet addressed the
fundamental, conceptual weaknesses that have resulted in substantial waste
and inefficiency in the excess property reutilization program.
Analysis of Reutilization Program Identifies Billions of Dollars in Waste and
Inefficiency
Overall, our analysis of the $33 billion in reported excess commodity
disposals in fiscal years 2002 through 2004 showed that $4 billion related
to items in new, unused, and excellent condition. Of the $4 billion, we
determined that $3.5 billion (88 percent) 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. As discussed in our
report, our analysis of $18.6 billion9 in fiscal year 2002 and 2003 excess
commodity disposal activity identified $2.5 billion in excess items that
were reported to be in new, unused, and excellent condition (A condition).
Although federal regulations and DOD policy require reutilization of
excess property in good condition, to the extent possible, our analysis
showed that DOD units only reutilized $295 million (12 percent) of these
items. The remaining $2.2 billion (88 percent) of the $2.5 billion in
disposals of A-condition excess commodities were not reutilized, but
instead were transferred, donated, sold, or destroyed. Similarly, our
analysis of $14.3 billion in fiscal year 2004 disposal activity identified
$1.5 billion in excess commodity items that were reported to be in A
condition. Of the $1.5 billion in A-condition excess items, DOD units
reutilized $200 million (13 percent) and transferred, donated, sold, or
destroyed the remaining $1.3 billion (87 percent). We also found that
during fiscal years 2002 and 2003, DOD purchased at least $400 million
(over $200 million each year) of identical items instead of reutilizing
available excess items in A condition. To illustrate continuing
reutilization program waste and inefficiency, we purchased several new and
unused excess DOD commodity items that were being purchased by DLA, were
currently in use by the military services, or both. 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 national stock numbers (NSN)10 needed to
identify like items.
9 The reported acquisition value at the time the items were turned in as
excess.
10 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
North Atlantic Treaty Organization (NATO) code (to indicate user
countries) and a 7-digit designation for a specific item, such as a cold
weather boot.
Fiscal Year 2002-2004 Excess Commodity Disposal Activity
DRMS is responsible for disposing of unusable items, often referred to as
"junk," as well as facilitating the reutilization of usable items.
Although the majority of DOD's excess property disposals relate to items
in unserviceable condition, DOD also disposed of billions of dollars of
serviceable items, including excess commodities in A condition from fiscal
years 2002 through 2004. Our analysis of DRMS data showed that $28.1
billion of the $33 billion in excess DOD commodity disposals from fiscal
year 2002 through fiscal year 2004 consisted of items listed in
unserviceable condition, including items needing repair, items that were
obsolete, and items that were downgraded to scrap. The remaining $4.9
billion in excess commodity disposals consisted of items reported to be in
serviceable condition, including $4 billion in excess commodities reported
to be in A condition. However, of the $4 billion, DOD units reutilized
only $495 million (12 percent) of these items during the 3-year period.
The data reliability issues noted above and our interviews, case studies,
and statistical sample results indicate that the magnitude of waste and
inefficiency associated with disposals of A-condition items could be much
greater. As shown in figure 1, items that were not reutilized by DOD were
transferred to federal agencies or special programs, donated to states,
sold to the public, or destroyed by demilitarization or through scrap and
hazardous materials contractors.
Figure 1: Waste and Inefficiency in Fiscal Year 2002 through Fiscal Year
2004 Disposals of Excess DOD Commodities Reported To Be in New, Unused,
and Excellent Condition
Fiscal years 2002-2004
12% $495 million DOD reutilization
88% $3.5 billion
9% $363 million DOD special programs ($138 million) Federal agency
transfers ($145 million) Donations to states ($80 million)
28% $1.1 billion Demilitarization, scrap, and hazardous material disposals
51% $2 billion Public sales
DOD reutilization
Other disposals
Source: GAO analysis.
We found that the percentage of DOD reutilization of excess property was
higher in fiscal year 2002 than in fiscal years 2003 and 2004. According
to DRMO officials, reutilization was higher in fiscal year 2002 because
excess items were pulled back to support deployment to Afghanistan and
Iraq. In fiscal year 2003, procurement to support the war on terrorism
began to keep up with the demand for supplies, and reutilization of excess
property decreased. DRMS officials attribute the fiscal year 2004 increase
in DOD reutilization to the establishment of the Joint Services Nuclear,
Biological, and Chemical Equipment Assessment Program (JEAP) to inspect
excess military clothing, tents, and other textile items and reissue items
in good condition. The increase in disposal activity in fiscal years 2003
and 2004 relates to turn-ins of property used in support of Operation
Enduring Freedom and Operation Iraqi Freedom. Table 1 shows disposal
activity related to A-condition excess commodities for fiscal years 2002
through 2004.
Table 1: Fiscal Year 2002 through 2004 Disposals of Excess DOD Commodities
in New, Unused, and Excellent Condition
Dollars in millions
Fiscal year Fiscal year Fiscal year
Disposal method 2002 2003 2004 Total
DOD reutilization $145 $150 $200 $495
(14%) (10%) (13%) (12%)
Special programs 45 46 47
Federal agency transfers 58 45 42
Donations to states 28 26 26
Subtotal, special programs, $131 $117 $115 $363
transfers, and donations (12%) (8%) (8%) (9%)
Demilitarization, scrap, and $102 $532 $480 $1,114
hazardous material disposals (10%) (37%) (32%) (28%)
Public sales $672 $645 $703 $2,020
(64%) (45%) (47%) (51%)
Total disposals $1,050 $1,444 $1,498 $3,992
(100%) (100%) (100%) (100%)
Source: GAO analysis.
Unnecessary Commodity Purchases
Our analysis of fiscal year 2002 and 2003 DLA commodity purchases and DRMS
excess property inventory data identified numerous instances in which the
military services ordered and purchased items from DLA at the same time
identical items-items with the same NSN-that were reported to be in new,
unused, and excellent condition were available for reutilization. We found
that DOD purchased at least $400 million of identical items during fiscal
years 2002 and 2003-over $200 million each year-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, 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.
Fiscal Year 2004 and 2005 Requisitions and Purchases Demonstrate
Continuing Waste and Inefficiency
To determine whether the problems identified in our analysis were
continuing, we monitored DRMS commodity disposal activity from May 2004
through April 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. As discussed in our report,11 we used the GSA Federal Disposal
System, available to all federal agencies, to requisition several new and
unused excess DOD commodity items during our audit in fiscal year 2004 and
the first half of fiscal year 2005, 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 also purchased, at minimal cost,
several excess DOD commodity items in new and unused condition over the
Internet at govliquidation.com-the DRMS liquidation contractor's Web
site.12 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.
From December 2004 through April 2005, we purchased several new, unused
excess DOD commodity items, including over 8,000 military badges, medals,
and insignias; 8 new, unused Cooper Trendsetter SE tires; and Class A
military uniforms. Although these items had a total reported acquisition
cost of $11,522, we paid a total of $1,427 for these items, including tax,
buyer's premium, and shipping cost.
New, unused DOD badges, medals, and insignias. On December 6, 2004, we
purchased 8,526 excess DOD badges, medals, and insignias that are used to
indicate rank, the unit or program to which a military member or civilian
employee is assigned, or service awards. These items had a reported
acquisition cost of $9,518. We paid a total of $1,102, including buyer's
premium and tax, for these items-about 12 cents on the dollar. Units and
program areas designated by the badges and insignias include
11 GAO-05-277.
12 Government Liquidation, LLC is the DRMS commercial venture partner
(contractor) for public sales of excess DOD property.
Army Rangers, Mountain, and Airborne; Air Force Air Traffic Controller;
and DOD Scientific Consultant. Rank insignias include Air Force Chief
Master Sergeant and Air Force Technical Sergeant; Navy Captain, Midshipman
Lieutenant, and Midshipman Lieutenant Commander; and Army Command Sergeant
Major and Master Sergeant. The listed condition code of these items ranged
from A4 (serviceable, usable condition) to H7 (unserviceable, condemned
condition). However, our inspection of the badges and insignias that we
purchased showed that none of them had been used, and many of them were in
original manufacturer packages. Further, DOD is continuing to purchase and
use most of these items. The photograph in figure 2 shows examples of some
of the badges, medals, and insignias that we purchased.
Figure 2: Examples of Excess DOD Badges, Medals, and Insignias Purchased
over the Internet in December 2004
Source: GAO.
New, unused excess DOD tires. We purchased eight new, unused Cooper
Trendsetter SE 13-inch steel-belted radial tires on February 18, 2005.
According to the Army project officer, these tires are used on
overthe-road passenger vehicles, and one customer ordered them for use on
a
forklift. DOD units are continuing to purchase and use these same tires.
The most recent purchase of 50 of these tires was made in April 2005. The
eight tires had a total reported acquisition value of $404. We paid $113
for the tires, including buyer's premium and tax, and an additional $154
shipping cost. The tires were listed in A4 condition (usable, with some
wear). However, we found that the tires still had manufacturer labels on
the tread and blue paint over the whitewalls, indicating that they were
new and unused. The tires were turned in as excess by the North Island
Naval Air Station's Aircraft Intermediate Maintenance Detachment.
According to the Army Tank Automotive and Armaments Command Project
Officer,13 the NSN listed on the turn-in document was incorrect. We found
that inaccurate item descriptions, including NSNs, prevent items from
being selected for reutilization. Figure 3 is a photograph of the excess
DOD tires that we purchased over the Internet in February 2005.
Figure 3: New, Unused Excess Cooper Trendsetter SE Tires Purchased over
the Internet in February 2005
Source: GAO.
13 The Army has product management responsibility for these tires.
New, unused Class A military uniforms. We purchased several Class A
military uniforms over the Internet on April 7, 2005. The uniforms were
listed as being in H7 (unserviceable, condemned) condition. Although the
uniforms that we purchased over the Internet from DOD's liquidation
contractor had a listed acquisition cost of $1,600, we paid a total of
$58, including buyer's premium and sales tax, to acquire them-about 4
cents on the dollar. After receiving our purchase we determined that we
had in fact purchased 27 new, unused uniform coats; 4 pairs of new, unused
uniform trousers; 54 jackets in excellent condition; 45 pairs of trousers
in excellent condition; and 5 women's uniform skirts and 1 pair of slacks
in excellent condition. DOD is continuing to purchase and issue two of the
four types of trousers that we purchased over the Internet. According to
the DLA clothing and textiles product manager for dress uniforms, the Army
switched from a matte finish gold button to a shiny sta-briteTM gold
button on October 1, 2003. Although the Army ordered and paid for the new
replacement buttons for existing dress uniforms, it later determined that
hiring a contractor to replace the buttons or sending the coats back to
the manufacturers for button replacement would be very expensive. The Army
decided to use the coats with the older buttons to fill Reserve and Junior
Reserve Officer Training Corps (ROTC and JROTC) orders until current
supplies are exhausted. However, our monitoring of DOD liquidation sales
found that many class A uniforms with the older buttons are being sold
over the Internet for pennies on the dollar instead of being issued to
ROTC and JROTC. In addition, we observed the new sta-briteTM buttons being
sold over the Internet in May 2005. Figure 4 is a photograph of one of the
excess new, unused Class A uniforms with the matte finish buttons that we
purchased over the Internet in April 2005.
Figure 4: New, Unused Excess Class A Uniforms Purchased in April 2005
Source: GAO.
We also purchased an earlier sales lot of the same Class A military
uniforms over the Internet on February 16, 2005. Our winning bid was $81
for 166 uniform jackets and trousers, which had a listed acquisition cost
of $10,424. However, when we arrived at the Great Lakes sales location
near Chicago to pick up the uniforms, DOD liquidation contractor personnel
were unable to locate them. Contractor personnel explained that our
purchase may have been mistakenly given to another customer. To
compensate, we were offered other items available for sale. However, these
items were not in A condition. Instead of accepting them, we requested and
received a refund. As discussed later, another of our Internet purchases
was damaged due to a leaky roof at the Norfolk liquidation sales location.
Management Control Breakdowns Resulted in Reutilization Program Waste and
Inefficiency
The $3.5 billion in DOD waste and inefficiency that we identified in our
analysis of fiscal year 2002 through 2004 excess property disposal
activity stemmed from management control breakdowns across DOD. Key
factors in the overall DRMS management control environment that
contributed to waste and inefficiency in the reutilization program
included (1) unreliable excess property inventory data; (2) inadequate
DRMS oversight, accountability, physical control, and safeguarding of
property; and (3) outdated, nonintegrated excess inventory and supply
systems. In addition, for many years our audits of DOD inventory
management14 have reported that continuing unresolved logistics management
weaknesses have resulted in DOD purchasing more inventory than it needed.
DOD reutilization program waste and inefficiency is symptomatic of the
inventory and supply chain management issues that have been considered
high risk by GAO since 1990. Our analysis of fiscal year 2002 through
fiscal year 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. Our analysis of fiscal year 2004 excess
commodity turn-ins showed that $1.3 billion (48 percent) of the $2.7
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
Our interviews, case studies, screening visits, and statistical tests of
excess commodity inventory led us to conclude that unreliable data are a
key cause of the ineffective excess property reutilization program. GAO's
internal control standards15 require assets to be periodically verified to
control records. In addition, DRMS policy16 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 and
DLA supply depot management have 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
14 GAO-04-689 and GAO-03-98.
15 GAO, Standards for Internal Control in the Federal Government,
GAO/AIMD-00-21.3.1 (Washington, D.C.: November 1999).
16 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).
Problems with Excess Inventory Items Noted by Military Services and Other
Users
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.
Military service officials also told us about the types of problems they
have experienced with property acquired from DRMOs. Army, Navy, and Air
Force medical officials, in particular, told us that they do not reutilize
excess medical items stored at DRMOs because items can become damaged
during shipment to and movement within the DRMO warehouses. Other users of
excess DOD property, including special program, federal agency, and state
officials gave us numerous examples of problems they encountered with
requisitions of excess DOD property. Several officials noted that these
problems have caused them to lose confidence in the reutilization process.
The following examples are typical of what we were told.
o An Army official told us that he requisitioned 20 excess padlock sets.
When he received the padlocks the keys were missing. After his second
attempt to requisition excess DOD padlocks with keys failed, he threw the
padlocks in a dumpster because they were useless to him and it would cost
too much to return them to the DRMO.
o An Army official told us that items may be in new, unused condition
when they leave the DRMO, but are damaged during shipment. The official
cited his experience with an order of thin copper sheets for use in
testing electronic equipment. The sheeting was shipped on a pallet that
was too small and other material was stacked on top of it.
o A Fairchild Air Force Base official told us that the 92nd Logistics
Readiness Squadron requisitioned 80 sleeping bags from the Hawaii DRMO but
only received 56 of them. The official told our investigators that the
sleeping bags were sealed in heavy-duty plastic bags and were in excellent
condition. However, some of the boxes the sleeping bags were shipped in
had been damaged by rain and handling by the time he received them.
Statistical Samples Identified Problems with Excess Inventory Accuracy
Our statistical tests found significant problems with controls for
assuring the accuracy of excess property inventory. Estimated error rates
for the five DRMOs we tested ranged from 8 percent at one DRMO to 47
percent at another,17 and estimated error rates for the five DLA supply
depots we tested ranged from 6 percent to 16 percent,18 including errors
related to physical existence of turn-ins and condition code.19 Our
condition code tests determined whether the condition code was accurately
recorded as serviceable or unserviceable. We estimated that errors related
to condition code accuracy ranged from 6 percent to 26 percent at the 5
DRMOs we tested.20 Overall, we found that DRMO errors were caused by
erroneous turn-in documentation prepared by military units and the failure
of DRMO personnel to verify turn-ins at the time they were received and
correct errors before recording the receipts in excess inventory. Most DLA
supply depot errors related to untimely recording of transactions for
changes in inventory status and inaccurate quantities. We did not find
problems with condition codes at the DLA depots.
An example from our Norfolk DRMO statistical sample illustrates how
erroneous inventory data can result in waste and inefficiency. On June 30,
2004, the Navy's Environmental Health Center in Portsmouth, Virginia,
turned in six new, unused Level III biological safety cabinets21 with a
total acquisition cost of $120,000. The Navy unit 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.
17 Sampling errors for our DRMO estimates did not exceed 10 percentage
points at the 95percent confidence level.
18 Sampling errors for our DLA supply depot estimates did not exceed 7
percentage points at the 95-percent confidence level.
19 Our physical existence tests included whether turn-ins recorded in
inventory could be located, whether inventory changes were recorded within
7 days, and the accuracy of item descriptions (including item name(s) and
NSN(s)) and quantities. Although some transactions included more than one
type of error, we only counted one failure for a transaction.
20 Sampling errors for our DRMO estimates did not exceed 11 percentage
points at the 95percent confidence level.
21 The technical name for these safety cabinets is closed loop containment
isolators.
The Navy unit improperly used a local stock number (LSN) 22 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,23 and therefore they are required to be identified by an NSN or
other information that accurately describes the item, the end item
application, and the applicable demilitarization code.24 Further, the DOD
risk assessment performed in response to a recommendation in our November
2003 report25 called for Level III biological safety cabinets to be
destroyed when no longer needed by DOD. Although Norfolk DRMO personnel
advised DRMS officials of the need to correct the turn-in document errors
in July 2004, as of the end of our audit in February 2005, the information
had not been corrected and the safety cabinets had not been posted to the
DRMS reutilization Web page to indicate that they were available for
reutilization.
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 as a result of
our efforts, the DOD scientists at Dugway had requisitioned the six Level
III safety cabinets for reutilization.
22 An LSN consists of the four-digit federal supply classification number,
a two-digit NATO code (user country code), and up to a seven-character
description, such as "monitor" for a computer monitor and "boots" for cold
weather boots.
23 Commerce Control List, 15 C.F.R. pt. 774, supp. 1, category 2,
Materials Processing, para. f (2), Protective and Containment Equipment
(2005).
24 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).
25 GAO-04-15NI.
Weaknesses in Reutilization Program Oversight and Physical Inventory
Control
Excess Property Losses
We found hundreds of millions of dollars in potential waste and
inefficiency associated with the failure to safeguard excess property
inventory from loss, theft, and damage. As previously discussed, our
statistical tests of excess commodity inventory at five DRMOs and five DLA
supply depots identified significant numbers of missing items. Because the
DRMOs and DLA supply depots had no documentation to show that these items
had been requisitioned or sent to disposal contractors, they cannot assure
that these items have not been stolen. According to DRMS data, DRMOs and
DLA supply depots reported a total of $466 million in excess property
losses related to damage, missing items, theft, and unverified adjustments
over a period of 3 years. However, as discussed below, we have indications
that this number is not complete. Also, because nearly half of the missing
items reported involved military and commercial technology that required
control to prevent release to unauthorized parties, the types of missing
items were often more significant than the number and dollar value of
missing items.
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 2, 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,26 these weaknesses also reflect
security risks. GAO Standards for Internal Control in the Federal
Government27 require 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. Our investigations of
reported losses found that the failure to verify and accurately document
transactions and events at the beginning of the disposal process and
report and investigate losses as they occur obscures or eliminates the
audit trail. Weaknesses in accountability leave DOD vulnerable to the risk
of theft, and fraud, waste, and abuse with little risk of detection.
26 DOD 4160.21-M-1, Defense Demilitarization Manual, ch. 1. 27
GAO/AIMD-00-21.3.1.
Table 2: 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 statistical samples included
turnins of 72 chemical and biological protective suits, 21 pairs of
chemical and biological protective gloves, 47 wet weather parkas that were
subject to demilitarization controls, and 7 sleeping bags, a cold weather
coat, computer equipment, and various other items. Reported DRMO losses
included 76 units of body armor, 75 chemical and biological protective
suits (in addition to those identified in our Columbus DRMO sample),28 5
guided missile warheads,29 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 clothing and equipment items requiring demilitarization.
Our follow-up investigations found a pervasive lack of physical
accountability over excess inventory, which leaves DOD vulnerable to the
risk of theft and fraud, waste, and abuse. In many cases, it is not
possible to determine whether discrepancies represent sloppy recordkeeping
or the
28 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.
29 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.
loss or theft of excess property due to the failure to verify turn-in
documents and correct errors at the time excess items were received at the
DRMOs.
In the case of our Columbus DRMO sample, we found that inventory records
were not adjusted for missing quantities in our sample. Instead, DRMO
personnel recorded the entire amount of the listed quantities as being
transferred to either the liquidation sales contractor or the Joint
Service Nuclear Biological and Chemical Equipment Assessment Program
(JEAP) for inspection and reissue of military clothing and equipment. Our
review of transaction data for Columbus DRMO transfers showed that JEAP
did not confirm most of the items reported as transferred. For example,
JEAP confirmed receiving only 7 of the 17 turn-ins of clothing and textile
items. Further, the Columbus DRMO recorded a transaction to show that the
72 chemical and biological protective suits identified as missing during
our statistical tests of Columbus DRMO inventory were transferred to JEAP
on November 10, 2004. However, our follow-up with JEAP officials found
that they have no record of receiving the protective suits. The Columbus
DRMO's apparent manipulation of the inventory data avoided reporting the
missing items as losses.
Our follow-up investigations of other selected DRMO losses found the
following.
o An Air Force turn-in of 75 chemical and biological protective suits was
received, placed in the Shaw RIPL (a receipt in place location under
authority of the Jackson DRMO) warehouse on May 28, 2002, and subsequently
disappeared. DRMO personnel told DRMS investigators that the 75 protective
suits may have been included in a November 15, 2002, shipment to the
Jackson DRMO in South Carolina. However, because DRMO personnel recorded
box counts instead of turn-in document numbers and item counts, there is
no detailed record of the items that were shipped between the two excess
property warehouses.
o Twenty units of body armor reported lost at the Meade DRMO initially
had been ordered by Israel on November 8, 2000. Our investigators
confirmed that the body armor was never picked up for shipment to Israel.
According to the loss report, the items were relocated from the shipping
area to the demilitarization storage area of the DRMO on May 8, 2002. A
loss investigation was initiated by the Area Manager for the Meade DRMO in
March 2004. However, because the Meade DRMO
contractor had improperly destroyed inventory records after 2 years, attempts to
determine the events surrounding the loss were fruitless.
o Our investigation of 18 reports on a total of 52 units of body armor
missing from the Hood DRMO during fiscal years 2002 and 2003 determined
that these items were stored outside in an unsecure area resulting in the
theft of at least 48 units of body armor. A DRMS investigative report
noted that items requiring demilitarization had been stored in this area
over a 2-year period, even though the security fence had barbed wire that
was cut or missing and the high ground level outside the fence provided
easy access. According to a DRMO official, a work order for the fence
repair had been submitted but the repairs had not been made.
o The Naval Operational Logistics Support Center-Ammo, which was
responsible for a turn-in of guided missile warheads, the DRMO that
received these items, and the Demilitarization Center each recorded a
different quantity for the turn-in. However, quantity discrepancies were
not resolved at any point during the turn-in and disposal process. As a
result, there is no audit trail to determine whether or where, when, or
how the reported loss or a recordkeeping error occurred. For example, the
Navy unit reported a turn-in of 24 warheads that had been used in testing
but were certified as inert. DRMO personnel counted canisters and loose
components and determined there were 32 warheads. The Anniston
Demilitarization Center reported that a total of 27 warheads were received
for destruction.
DLA supply depot losses. Our statistical samples 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 that the missing items did not relate to
theft. Missing items in our DLA depot statistical samples included several
sensitive items, such as classified radio frequency amplifiers and circuit
boards, aircraft parts, and computer equipment that required trade
security or demilitarization controls.
We obtained DRMS data on DLA supply depot reports of excess property
losses, including missing and damaged property and unverified adjustments.
We investigated reported losses of selected aircraft parts at two DLA
supply depots-Oklahoma City and Warner Robins-that reported the largest
amount of depot losses. DLA Directive 5025.30, DLA One Book, includes a
section on Inventory Adjustment Research (dated
October 21, 2004), which sets inventory accuracy goals for DLA supply
depots and requires causative research-an in-depth investigation-of
adjustments for selected items30 and suspected fraud, waste, and abuse to
determine why they occurred. A Financial Liability Investigation of
Property Loss is required if the adjustment meets specific criteria,
including (1) gains or losses of classified or sensitive material; (2) an
adjustment in excess of $2,500 for pilferable material; and (3) a loss
where there is a suspicion of fraud, theft, or negligence. However, we
found that DLA depot personnel did not thoroughly investigate most
adjustments related to reported losses of sensitive items with
demilitarization controls that we selected for investigation. Supply depot
officials told us that they assumed the losses represented inventory
recordkeeping errors, even though causative research results were
inconclusive.
Property Damage In addition to reported losses, we found significant
instances of property damage at DRMS liquidation contractor sales
locations. Because the terms and conditions of liquidation sales specify
that all property is sold "as is" and assigns all risk of loss to buyers,
the buyers have no recourse when property is damaged after being sold 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. On October 7, 2004, we purchased 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, these items had
become damaged due to rain and a leaky roof at the Norfolk, Virginia,
liquidation sales location.
The majority of 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
30 DOD 4000.25-2-M, Military Standard Transaction Reporting and
Accountability (MILSTRAP), (Change 2, Apr. 28, 2003), Ch. 7, "Physical
Inventory Control," Section C7.9.3.2, identified selected items as
classified and sensitive items regardless of dollar value, pilferable
items, controlled inventory items, with an extended value greater than
$2,500, and all adjustments with an extended value of greater than $16,000
or greater than 25 percent unit variance and greater than $5,000.
resources and warehouse capacity to process, properly store, and sell the
volume of property received. For example, excess DOD property sent to the
Huntsville, Alabama, liquidation sales location was stored outside
unprotected from weather, including sun, wind, rain, and hurricanes during
the summer and fall of 2004. The liquidation contractor's failure to
record these items in sales inventory at the time they were received, when
combined with lost and illegible property labels due to weather damage,
resulted in a significant loss of accountability for many of these items.
Outdated, Nonintegrated Systems Impair Economy and Efficiency
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 report31 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. 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 longstanding
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.
31 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).
Concluding Comments 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; and develop effective integrated systems and processes 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 that are key to identifying items for
reutilization. Improved management of DOD's excess property and a strong
reutilization program would help save taxpayers hundreds of millions of
dollars annually.
Mr. Chairman and Members of the Subcommittee, this concludes my prepared
statement. We would be pleased to answer any questions that you may have.
Contacts and Acknowledgments
(192164)
For more information regarding this testimony, please contact Gregory D.
Kutz at (202) 512-9505, or [email protected] or Keith A. Rhodes at (202)
5126412, or [email protected]. Individuals making key contributions to this
testimony included Mario Artesiano, Stephen P. Donahue, Gayle L. Fischer,
Jason Kelly, Richard C. Newbold, Ramon Rodriguez, and John Ryan. Numerous
other individuals contributed to our audit and investigation and are
listed in our companion report. Technical expertise was provided by Sushil
K. Sharma, PhD, DrPH.
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