Defense Inventory: Navy's Procedures for Controlling In-Transit Items Are
Not Being Followed (Letter Report, 03/31/99, GAO/NSIAD-99-61).

Pursuant to a congressional request, GAO reviewed selected aspects of
the Navy's management procedures for controlling items in transit,
focusing on the: (1) reported value and types of inventory in transit
within and between storage and repair activities, vendors, and end users
that were unaccounted for (or lost); and (2) Navy's adherence to
procedures for controlling such in-transit inventory.

GAO noted that: (1) the Navy has not effectively controlled its
in-transit inventory and places enormous amounts of inventory at risk of
undetected theft or misplacement; (2) for fiscal years 1996-1998, the
Navy reported that it had lost over $3 billion in in-transit inventory,
including some classified and sensitive items such as aircraft
guided-missile launchers, military night vision devices, and
communications equipment; (3) the Navy's Inventory Control Point
(NAVICP) at Philadelphia, which manages the largest portion of the
Navy's inventory, reported the largest losses--$2.5 billion, or 84
percent of the Navy's in-transit losses; (4) however, GAO's work showed
that a few of the items reported as lost by NAVICP Philadelphia had in
fact been accounted for in inventory records; (5) Navy activities
involved in issuing and receiving inventory items have not always
followed the Navy's control procedures to ensure that in-transit items
are accounted for; (6) Navy units have not always reported to NAVICP
Philadelphia that they received requested items; (7) ineffective
accounting systems have been used to monitor receipts of items
redistributed between storage activities, shipped to and from repair
facilities, and shipped from end users; (8) NAVICP Philadelphia and its
shipping and receiving activities have not adequately investigated
unreported receipts of items redistributed between storage activities,
shipped to and from repair facilities, and shipped from end users; (9)
NAVICP Philadelphia has not monitored receipts of items it purchased
from commercial sources; (10) as early as 1990, GAO reported that there
were indications of inadequate internal controls over procured assets;
(11) Naval Supply Systems Command and NAVICP Philadelphia oversight of
in-transit inventory has not been adequate; (12) although Navy officials
have initiated actions intended to correct the problems GAO cited, the
Navy has not established any performance measures, milestones, or
timetable for reducing the vulnerability of in-transit inventory to
theft or loss; and (13) the Navy has not identified management of
in-transit inventory as a significant weakness in its assessments of
internal controls, as provided in the Federal Managers' Financial
Integrity Act of 1982.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-99-61
     TITLE:  Defense Inventory: Navy's Procedures for Controlling 
             In-Transit Items Are Not Being Followed
      DATE:  03/31/99
   SUBJECT:  Military inventories
             Inventory control systems
             Property losses
             Military materiel
             Internal controls
             Performance measures
             Logistics
             Property and supply management
IDENTIFIER:  Philadelphia (PA)
             
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Cover
================================================================ COVER


Report to Congressional Requesters

March 1999

DEFENSE INVENTORY - NAVY'S
PROCEDURES FOR CONTROLLING
IN-TRANSIT ITEMS ARE NOT BEING
FOLLOWED

GAO/NSIAD-99-61

Defense Inventory

(709322)


Abbreviations
=============================================================== ABBREV

  DAAS - Defense Automated Addressing System
  DLA - Defense Logistics Agency
  DOD - Department of Defense
  GAO - General Accounting Office
  NAVICP - Naval Inventory Control Point
  NAVSUP - Naval Supply Systems Command

Letter
=============================================================== LETTER


B-279507

March 31, 1999

The Honorable Richard Durbin
The Honorable Tom Harkin
United States Senate

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

In February 1998, we reported that the Department of Defense (DOD)
did not have receipts for about 60 percent of its 21 million
shipments to end users in fiscal year 1997.\1 Among the DOD
components, the Navy was responsible for almost one-half of DOD's
12.4 million unacknowledged receipts.  As agreed with your offices,
we reviewed selected aspects of the Navy's management procedures for
controlling items in transit.  More specifically, we (1) identified
the reported value and types of inventory in transit within and
between storage and repair activities, vendors, and end users that
were unaccounted for (or lost) and (2) assessed the Navy's adherence
to procedures for controlling such in-transit inventory. 

This report is one in a series addressing defense inventory
management as a high-risk area in the federal government because of
vulnerabilities to fraud, waste, and abuse.\2 Excess property that is
in transit between the military services and disposal offices is the
topic of a separate report we will issue later this year. 


--------------------
\1 Department of Defense:  In-Transit Inventory (GAO/NSIAD-98-80R,
Feb.  27, 1998). 

\2 In 1990, we began a special effort to review and report on the
federal program areas we identified as high risk because of
vulnerabilities to waste, fraud, abuse, and mismanagement.  This
effort, which was supported by the Senate Committee on Government
Affairs and the House Committee on Government Reform, brought a much
needed focus on the problems that were costing the government
billions of dollars.  We identified inventory management as high risk
in our 1999, 1997, 1995, and 1992 high-risk reports.  A list of
related GAO products is at the end of this report. 


   RESULTS IN BRIEF
------------------------------------------------------------ Letter :1

The Navy has not effectively controlled its in-transit inventory and
places enormous amounts of inventory at risk of undetected theft or
misplacement.  For fiscal years 1996-98, the Navy reported that it
had lost over $3 billion in in-transit inventory, including some
classified and sensitive items such as aircraft guided-missile
launchers, military night vision devices, and communications
equipment.  The Navy's Inventory Control Point (NAVICP) at
Philadelphia, which manages the largest portion of the Navy's
inventory, reported the largest losses--$2.5 billion, or 84 percent
of the Navy's in-transit losses.  However, our work showed that a few
of the items reported as lost by NAVICP Philadelphia had in fact been
accounted for in inventory records. 

Navy activities involved in issuing and receiving inventory items
have not always followed the Navy's control procedures to ensure that
in-transit items are accounted for.  Specifically,

  -- Navy units have not always reported to NAVICP Philadelphia that
     they received requested items. 

  -- Ineffective accounting systems have been used to monitor
     receipts of items redistributed between storage activities,
     shipped to and from repair facilities, and shipped from end
     users. 

  -- NAVICP Philadelphia and its shipping and receiving activities
     have not adequately investigated unreported receipts of items
     redistributed between storage activities, shipped to and from
     repair facilities, and shipped from end users. 

  -- NAVICP Philadelphia has not monitored receipts of items it
     purchased from commercial sources.  As early as 1990, we
     reported that there were indications of inadequate internal
     controls over procured assets. 

  -- Naval Supply Systems Command and NAVICP Philadelphia oversight
     of in-transit inventory has not been adequate.  Although Navy
     officials have initiated actions intended to correct the
     problems we cited, the Navy has not established any performance
     measures, milestones, or timetable for reducing the
     vulnerability of in-transit inventory to theft or loss. 
     Further, the Navy has not identified management of in-transit
     inventory as a significant weakness in its assessments of
     internal controls, as provided in the Federal Managers'
     Financial Integrity Act of 1982. 

When considered as a whole, weaknesses in monitoring and controlling
its in-transit inventory have undermined the Navy's ability to
measure progress toward achieving the goal set out in DOD's
Performance Plan for fiscal year 1999, which responded to
requirements of the Government Performance and Results Act.  For
example, in its plan, DOD sets a goal of achieving 90-percent
visibility over its inventory by 2000. 

To improve controls over the Navy's in-transit inventory, we are
recommending that the Secretary of the Navy ensure that (1) receipts
of in-transit shipments are adequately accounted for and monitored;
(2) records of inventory receipts are routinely updated; (3)
in-transit inventory problems are included in assessments related to
the Federal Managers' Financial Integrity Act; and (4) performance
measures, milestones, and timetables are established to help monitor
progress in reducing Navy inventory's vulnerability to loss. 


   BACKGROUND
------------------------------------------------------------ Letter :2

As of September 30, 1997, the Navy reported that the value of its
inventory was $16.8 billion.\3 The Naval Supply Systems Command
(NAVSUP) administers the Navy supply system and provides in-transit
inventory management policies and procedures.  The Command, through
its NAVICP,\4 initiates purchases and directs inventory movement for
its customers.  Until the inventory reaches its intended destination,
NAVICP refers to it as in transit.  The major categories of
in-transit inventory are as follows: 

  -- Warehoused material--material redistributed between storage
     activities, broken items shipped from Navy consolidation points
     to a commercial or other military service repair facility, and
     material returned from a commercial or other military service
     repair facility or an end user. 

  -- Purchased material--new material shipped from a commercial
     source to a storage activity. 

  -- End-user material--material ordered from a storage activity or
     commercial source by a unit that expects to use it. 

The Navy is required to use a variety of inventory tracking
procedures to monitor shipment and receipt of in-transit items. 
Although the specific procedures for each major category have some
differences, they all have three common control elements.  First, the
recipient of the material is responsible for notifying the NAVICP
once the item has been received.  This notification is an internal
control designed to account for all in-transit assets.  Second, if
within 45 days of shipment NAVICP has not been notified that a
shipment has arrived, it is required to follow up with the intended
recipient.  The rationale behind this requirement is that until
receipt is confirmed, the exact status of the shipment is uncertain
and therefore vulnerable to fraud, waste, and abuse.  Third, the Navy
is required to oversee in-transit inventory to assess the
effectiveness of policies and procedures governing that inventory. 
Appendix II contains additional details on the receipt acknowledgment
and follow-up procedures for in-transit items. 

Implementing inventory controls is a shared responsibility of the
NAVICP and shipping and receiving activities, which include Defense
Logistics Agency (DLA)\5 and Navy-managed activities, and repair
facilities. 


--------------------
\3 This amount includes three categories of items that are valued
differently.  Serviceable items are valued at the latest acquisition
cost; the value for items requiring repair are reduced by the cost of
repair; and excess, obsolete, and unserviceable
items--reutilization/disposal inventory--are valued at salvage prices
(2.7 percent of latest acquisition cost for fiscal year 1997). 
However, the standard price (i.e., latest acquisition cost and a
surcharge covering the costs to operate the supply system) is used
throughout DOD in its logistics systems.  Therefore, throughout the
remainder of this report, the standard price is the value associated
with in-transit inventory. 

\4 NAVSUP has one Inventory Control Point that has offices in two
cities--Philadelphia and Mechanicsburg, Pennsylvania. 

\5 The Defense Logistics Agency operates and manages storage
activities.  It receives, stores, and issues inventory and maintains
inventory records. 


   ACCOUNTABILITY IS LOST FOR
   SUBSTANTIAL AMOUNTS OF
   IN-TRANSIT INVENTORY
------------------------------------------------------------ Letter :3

The Navy reported that it was unable to account for substantial
amounts of in-transit inventory.  This inventory is vulnerable to
theft or loss and could cause managers to implement inefficient,
ineffective decisions and practices regarding purchases.  Between
October 1995 and September 1998, the Navy reported that it wrote off
as lost in-transit inventory valued at over $3 billion.  Our analysis
of financial reports showed that NAVICP Philadelphia was responsible
for about $2.5 billion, or 84 percent, of these losses.\6 Figure 1
summarizes the value of in-transit inventory losses by inventory
control point. 

   Figure 1:  Reported Value of
   Navy-Owned In-transit Inventory
   Losses by Inventory Control
   Point

   (See figure in printed
   edition.)

Note:  Numbers do not add due to rounding. 

The Navy's in-transit inventory losses may be greater than the Navy
recognizes because of uncertainties about the status of shipments to
end users that did not have a corresponding notification of receipt. 
Figure 1 does not include any unaccounted for shipments to end users. 
For example, as we reported in February 1998, DOD did not have
receipts for about 60 percent of its 21 million shipments to end
users in fiscal
year 1997.  Among the DOD components, the Navy was responsible for
over one-third of DOD's 21 million shipments and almost one-half of
DOD's 12.4 million unacknowledged receipts (valued at $11.7 billion). 

Our review of 30,314 lost warehoused shipments (representing 132,793
items worth $753 million) at NAVICP Philadelphia in fiscal year 1997
showed that over 8,000 shipments contained military technology that
needed to be protected. 

Classified and sensitive items\7 included aircraft-guided missile
launchers, military night vision devices, and communications
equipment.  Moreover, some shipments reported as lost included
pilferable items such as radio sets and radar transmitters that have
a ready resale value or civilian application and are therefore
especially subject to theft.  Although not categorized by DOD as
pilferable, the lost items also included such items as video
recorders and generators.  Figure 2 summarizes the items lost in
transit by security classification and figure 3 shows the items'
value. 

   Figure 2:  Our Analysis of the
   Number of Lost Warehoused Items
   Managed by NAVICP Philadelphia

   (See figure in printed
   edition.)

   Figure 3:  Our Analysis of the
   Value of Warehoused Material
   Losses Managed by NAVICP
   Philadelphia

   (See figure in printed
   edition.)

Note:  Numbers do not add due to rounding. 

Naval Supply Systems Command and NAVICP Philadelphia officials
pointed out that in-transit losses for high-dollar items have
declined from
$1.2 billion to $600 million over the past 3 fiscal years but
acknowledged that in-transit inventory continues to be a primary
concern.  According to these officials, in some instances the
reported in-transit inventory losses might have resulted from
accounting adjustments and, as such, were not real losses.  They
further stated that in most cases, the reported losses occurred
because activities involved in the movement, repair, and storage of
in-transit items did not (1) notify NAVICP Philadelphia that they
shipped or received items as required by Navy regulations or (2)
respond to follow-up inquiries made by NAVICP Philadelphia.  However,
as we note in the following section, our review of lost in-transit
sample items revealed that the failure to comply with procedures for
controlling in-transit inventory did not stop with the issuing,
shipping, and receiving activities and did not result from accounting
adjustments as Navy officials asserted. 


--------------------
\6 Between October 1995 and September 1998, NAVICP Philadelphia
reported $32.4 billion in warehoused material had been in transit at
one time or another during the period. 

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


   PROCEDURES AND SYSTEMS FOR
   CONTROLLING IN-TRANSIT
   INVENTORY ARE INEFFECTIVE OR
   NOT FOLLOWED
------------------------------------------------------------ Letter :4

As a result of several significant control weaknesses, the Navy's
in-transit inventory is highly vulnerable to fraud, waste, and abuse. 
First, end users have not routinely reported receipt of items to the
NAVICP.  Second, the integrated accounting and logistics systems that
tie the Navy's accounting systems to its in-transit inventory
tracking systems have not been effective.  Third, NAVICP Philadelphia
and its issuing activities, intended recipients, and commercial
carriers have not adequately investigated cases in which warehoused
material was not acknowledged as received.  Fourth, NAVICP
Philadelphia has not monitored the receipt of purchased material from
commercial sources.  Fifth, NAVSUP and NAVICP Philadelphia have not
provided adequate oversight and monitoring of in-transit inventory. 


      END USERS' RECEIPTS OF
      MATERIAL WERE NOT ROUTINELY
      REPORTED
---------------------------------------------------------- Letter :4.1

End users have not routinely reported receipt of items to NAVICP
Philadelphia.  For a 1-year period ending in May 1998, NAVICP
Philadelphia closed the records for over $743 million in shipments
that did not have a notification of receipt and had been outstanding
for over 90 days.  The NAVICP transfers accountability of material
when it issues a release order to a DOD storage activity to ship the
material and then to customers when they receive the material.  End
users are required by DOD policy to record receipts of material and
notify the appropriate inventory control point within 5 calendar days
(either electronically or by mail). 

We judgmentally selected for review 92 reported end-user shipments
(valued at $5.2 million) whose receipt, according to NAVICP
Philadelphia records, had not been acknowledged.  We sought to
determine whether those shipments had in fact been received and
reported to NAVICP Philadelphia.  According to NAVICP Philadelphia
officials, 51 of the 92 shipments (valued at over $566,000) were to
storage activities and had been incorrectly shown as end-user
shipments.  Thus, the records of the shipments should not have been
closed by the NAVICP Philadelphia automated tracking system for
end-user receipts.  We then reviewed the status of these 51 shipments
in the warehoused material receipt tracking system.  NAVICP
Philadelphia and the intended recipient were unable to provide
evidence that four shipments had been delivered or received.  The
remaining 47 shipments had been received. 

Of the remaining 41 shipments (valued at $4.7 million), we determined
that 28 (valued at $3.3 million) had in fact been received and
accounted for, but the receipt acknowledgments had not been sent to
NAVICP Philadelphia.  According to one Defense Automated Addressing
System (DAAS)\8 Office official, the end users' receipt
acknowledgment codes were obsolete.  Consequently, DAAS did not
forward the acknowledgments to NAVICP Philadelphia.  When we informed
end-user officials that their acknowledgment codes were obsolete,
they said that the Navy had not yet changed its reporting systems and
procedures to conform with DOD's changes in the codes.  Our review
also showed other shortcomings in the execution of in-transit control
policies and procedures for the remaining 13 shipments.  For example: 

  -- One shipment valued at $606,330 was assumed by NAVICP
     Philadelphia to have been received by the end user but was never
     shipped by the depot. 

  -- Twelve shipments valued at $737,986 had been received by the end
     user but were not reported to NAVICP Philadelphia.  End-user
     officials said that their automated logistics system is not
     designed to acknowledge material receipt.  However, DOD policy
     states that if the reporting activity cannot transmit receipt
     electronically, it should prepare a manual material receipt
     acknowledgment and mail the form directly to the inventory
     control point. 


--------------------
\8 The DAAS Office is the single most comprehensive source in DOD for
identifying the movement of in-transit material.  It receives a vast
amount of shipping and receiving data and passes this information to
the appropriate inventory control point. 


      INTEGRATED ACCOUNTING AND
      LOGISTICS SYSTEMS WERE NOT
      ALWAYS EFFECTIVE
---------------------------------------------------------- Letter :4.2

Because of poorly integrated accounting and logistics systems, the
Navy may have written off as lost millions of dollars of warehoused
material shipments that had actually been received and accounted for
by NAVICP Philadelphia and in DAAS historical records.  Navy policy
for following up on in-transit material states that the NAVICP should
search its internal files for delinquent receipts of warehoused
material shipments.  Delinquent shipments, according to Navy policy,
should be written off as inventory losses if their receipts remain
unconfirmed after 6 months or 11 months, depending on their value. 
According to Navy policy, shipments of consumable items, depot-level
reparable items, and appropriated purchases\9 valued at less than
$2,500, $15,000, and $20,000, respectively, should be written off as
inventory losses if their receipts remain unconfirmed after 6 months. 
All other shipments require external follow-up and should be written
off as lost if their receipts remain unconfirmed after 11 months. 

At NAVICP Philadelphia, 15 (16 percent) of the 94 warehoused
shipments that we sampled were written off as lost despite the fact
that their receipts were recorded in NAVICP Philadelphia's internal
files and DAAS historical records 6 months to 1 year in advance of
the date they were written off.  These discrepancies reduce the
reliability of inventory financial reports, which thus obscure true
inventory losses, such as those resulting from theft or loss, and
misstate the number of items on hand. 

We informed NAVICP Philadelphia officials that their internal and
DAAS history files contained receipts for 15 warehoused shipments
that were written off as lost.  They said that in 11 cases, they had
not accurately identified these receipts because the Navy's general
ledger system, which ties its accounting systems to its logistics and
other key management systems and is used to identify the receipt of
shipments, did not update both accounting and logistics records with
the in-transit inventory receipts.  In the other four cases, the
receiving activities did not correctly enter receipt data into the
logistics system; thus, the NAVICP's integrated systems showed that
the items were not received.  NAVSUP officials said that until the
planned resystemization of its databases is complete, NAVICP
Philadelphia would need to rely on the Navy's general ledger system
to identify the receipt of shipments.  Our prior reports have pointed
out deficiencies in DOD's existing accounting and related systems,
including its logistics systems.\10


--------------------
\9 Consumable items are individual parts or assemblies that are
disposed of when replaced.  Depot-level reparable items are
components or assemblies that are returned to the supply system to be
repaired when replaced.  Appropriated purchases are centrally
purchased items that customers receive without charge from their
respective supply systems. 

\10 High-Risk Series:  Defense Financial Management (GAO/HR-97-3,
Feb.  1997) and Inventory Management:  Vulnerability of Sensitive
Defense Material to Theft (GAO/NSIAD-97-175, Sept.  19, 1997). 


      NAVICP'S EXTERNAL
      FOLLOW-UP/RESOLUTION OF
      WAREHOUSED MATERIAL WAS NOT
      ADEQUATE
---------------------------------------------------------- Letter :4.3

Although Navy policy requires external follow-up of unconfirmed
receipts of warehoused material over a certain dollar threshold,
NAVICP Philadelphia has not adequately followed up or resolved such
receipts.  According to Navy policy, the NAVICP should first seek
proof of shipment from the issuing activity on shipments of
consumable items, depot-level reparable items, and appropriated
purchases valued at more than $2,500, $15,000, and $20,000,
respectively, within 45 days from the date the material was issued. 
After obtaining that information, the NAVICP should seek proof of
delivery from the shipping carrier.  Navy policy, however, does not
set a specific time limit for replies from issuing activities,
shipping carriers, and intended recipients. 

We sampled 17 warehoused shipments (valued at $2.3 million) that
required external follow-up.  For these shipments, NAVICP
Philadelphia officials explained that commercial carriers, storage
activities, and repair contractors did not respond to their follow-up
requests and the shipments were later written off as lost.  However,
our review showed that 2 of the 17 shipments (valued at $215,760)
were erroneously written off as lost but in reality had been
acknowledged as received and accounted for in NAVICP inventory
records.  For the remaining 15 shipments (valued at $2,085,200),
NAVICP did not follow up when receipts were not returned. 
Specifically, in
6 of the 15 shipments (valued at $910,600) NAVICP Philadelphia did
not adequately follow up for proof of shipment, delivery, or receipt
with the appropriate activities.  For three other shipments (valued
at $479,040), the carriers did not respond to NAVICP's requests for
proof of delivery, and NAVICP did not initiate claims against the
carriers.  For five shipments (valued at $647,230), the storage or
repair activity did not respond to NAVICP's requests for proof of
receipt.  NAVICP Philadelphia officials could not explain what
happened to the remaining shipment (valued at $48,330) and could not
provide documentation that they had followed up on the shipment to
account for its loss. 

The following two examples illustrate how the inadequate follow-up
and resolution of overdue shipments results in reported in-transit
losses of material. 

In September 1996, the Defense Distribution Depot in Norfolk,
Virginia, issued 24 generators (valued at $212,640) to a commercial
carrier for shipment to a commercial repair contractor.  According to
NAVICP Philadelphia officials, the repair contractor did not
acknowledge receipt of the material.  Over 90 days later, in December
1996, the NAVICP requested proof of issuance from the Norfolk depot,
which the depot provided in January 1997.  In February 1997, the
NAVICP sought proof of delivery from the carrier, which did not
confirm delivery.  NAVICP officials said they did not initiate a
claim against the carrier.  The material was later written off as an
in-transit loss. 

In October 1995, the Norfolk depot reportedly issued 29 aircraft
guided-missile launchers (valued at over $181,830) to the Fleet and
Industrial Supply Center in San Diego, California.  According to
NAVICP Philadelphia officials, the Center did not acknowledge
receiving the equipment.  In February 1996, NAVICP sought proof of
issuance from the Norfolk depot, which it provided in April 1996. 
NAVICP Philadelphia officials said that they then unsuccessfully
sought proof of receipt from the Center from April to October 1996,
when the items were written off as lost. 


      PURCHASED MATERIAL RECEIPTS
      WERE NOT MONITORED
---------------------------------------------------------- Letter :4.4

NAVICP Philadelphia has not monitored the receipt of purchased
material from commercial sources.  Under Navy policy, NAVICP must
follow up with the appropriate depot on receipts for purchased
material 45 days from the date of the shipment, and the depot must
respond to NAVICP on the status of the shipments.  However, NAVICP
Philadelphia officials told us that they neither monitor shipments
nor follow up on delinquent receipts.  These officials said they were
unaware that NAVICP was required to initiate follow-up on delinquent
receipts.  During our review, NAVICP Philadelphia reported that
in-transit purchased material totaled over $75 million, of which $4.8
million in material had been in transit for over 1 year. 

We judgmentally selected and reviewed records for 28 shipments
(valued at about $1 million) with outstanding purchased material
balances over
1 year old and found the following: 

  -- Eight shipments (valued at $172,099) had been sent from
     commercial vendors to end users over 1 year earlier, but NAVICP
     Philadelphia officials had not attempted to follow up on
     delinquent receipt notifications to determine whether the
     shipments had been received. 

  -- NAVICP Philadelphia's automated records indicated that six
     shipments of purchased material (valued at $343,679) were in
     transit, but in fact there were no such shipments.  Instead,
     expenses of $343,679 had been incurred to terminate the six
     contracts erroneously processed as outstanding purchased
     material.  According to Navy officials, the Defense Finance
     Accounting Service disbursement system does not distinguish
     between material and termination settlement payments, both of
     which accrue purchased material. 

  -- One shipment (valued at $26,566) reflected outstanding purchased
     material in NAVICP Philadelphia's automated financial records,
     but the amount was in fact for internally generated progress
     payment expenditure corrections. 

  -- NAVICP Philadelphia's automated records indicated that two
     shipments of purchased material (valued at $38,750) were in
     transit, but in actuality $38,750 was the difference between the
     estimated and final contract cost of the two shipments. 

  -- Eleven shipments (valued at $438,395) were received, but one of
     NAVICP Philadelphia's automated inventory records was not
     updated to reflect the status of these shipments.  According to
     NAVICP Philadelphia officials, receipts for the shipments were
     processed in their automated contract status file but were not
     reflected in the procurement obligation status file. 
     Consequently, the established procurement remained on the
     NAVICP's file as outstanding purchased material.  No effort had
     been made to reconcile these 11 inconsistencies. 

In May 1990, we reported discrepancies between NAVICP Philadelphia's
purchased material shipment records and receipt records, a condition
that may adversely affect procurement decisions.\11 We further
reported that these discrepancies indicated inadequate internal
controls over procured assets and did not provide NAVICP Philadelphia
with reasonable assurance that its procurement system was adequately
protected from waste, fraud, and abuse.  In addition, the NAVICP
Philadelphia, in its fiscal years 1995-98 management control reviews,
cited ongoing problems with the systems used to track purchased
material. 


--------------------
\11 Navy Supply:  Procurement Leadtime Forecasting Needs Improvement
(GAO/NSIAD-90-78, May 18, 1990). 


      IN-TRANSIT INVENTORY RECEIPT
      AND FOLLOW-UP EFFORTS WERE
      NOT ALWAYS MONITORED
---------------------------------------------------------- Letter :4.5

NAVSUP and NAVICP Philadelphia have not always monitored warehoused
material receipt and follow-up efforts as required by Navy policy. 
The policy requires periodic reviews of in-transit inventory losses
to highlight breakdowns in the physical distribution process and
assist the NAVICP in monitoring its performance.  These reviews are
also designed to give NAVSUP a means of assessing the effectiveness
of its policies and procedures for governing in-transit inventory. 
Although NAVICP Philadelphia compiles summary data on in-transit
inventory losses, its officials responsible for inventory accuracy
acknowledged that they do not compile data that identifies the
predominant causes, sources, and magnitude of in-transit inventory
losses, even though the compilation of such information is required
by Navy policy.  The lack of this information impede's the Navy's
ability to determine which activities are responsible for lost or
misplaced items.  NAVSUP officials acknowledged that they had not
actively monitored in-transit inventory receipt and follow-up efforts
but had recently begun to review both systems and processes to
correct weaknesses. 

The Federal Managers' Financial Integrity Act of 1982 requires that
agency heads provide an annual statement to the President and
Congress on whether their agency's internal control systems comply
with the internal control objectives of the act.  If the agency head
decides that agency systems do not comply, a report identifying
material weaknesses involved and the plans and schedules for
correcting the weaknesses must be submitted with the statement.  The
statement is also to include a report on whether the agency's
accounting system conforms to the Comptroller General's standards. 
However, the Navy did not identify significant weaknesses in internal
controls over NAVICP's in-transit inventory in its Financial
Integrity Act statements over the past 3 years, despite the fact that
it had written off as lost inventory valued at more than $3 billion. 
Moreover, the Navy has not established any performance measures,
milestones, or timetables for reducing the risk of its in-transit
inventory to undetected theft or misplacement. 


      INTERNAL CONTROL WEAKNESSES
      UNDERMINE NAVY'S ABILITY TO
      MEET RESULTS ACT
      REQUIREMENTS
---------------------------------------------------------- Letter :4.6

The weaknesses in the Navy's internal controls over in-transit
inventory undermine its ability to measure its progress toward
achieving the goals set out in DOD's recent Performance Plan,
covering fiscal year 1999, prepared in response to the requirements
of the Government Performance and Results Act.  DOD's plan calls for
improving asset visibility in such areas as in-transit assets and
sets up the goal to achieve 90-percent visibility over material by
2000.  Current Navy internal controls over in-transit inventory do
not provide a reliable means to establish visibility.\12

Our review of items that the Navy had reported as being lost in
transit indicated that at least some had in fact been acknowledged as
received.  In other cases, Navy officials wrote off in-transit
inventory items because they did not know whether the items had been
stolen or otherwise lost.  In other words, they did not have adequate
visibility over them.  The lack of adequate internal controls
undermines the Navy's ability to do its part in helping DOD achieve a
90-percent visibility rate over inventories by 2000 and reduce
inventories by 2003.\13 The lack of controls may also limit the
ability of DOD and Navy officials to effectively manage the movement
of material and to make sound decisions about redistributing items
rather than buying new items or optimizing the positioning of stock. 

DOD is also required by the Strom Thurmond National Defense
Authorization Act for Fiscal Year 1999 to develop a comprehensive
plan to ensure visibility over in-transit secondary items.  For
secondary items, the law requires that DOD's plan address such issues
as the

  -- vulnerability of in-transit items to loss through fraud, waste,
     and abuse;

  -- loss of oversight of in-transit items, including items
     transported by commercial carriers; and

  -- loss of accountability over in-transit items due to either a
     delay of delivery of the items or a lack of notification of the
     delivery. 

The act called for DOD to submit its plan to Congress by March 1,
1999.  However, on March 4, 1999, DOD informed Congress that
additional time was necessary to prepare the plan due to, among other
things, the broad scope of the requirement and the need to thoroughly
study our findings on in-transit inventory.  DOD stated that it
intended to submit a comprehensive plan to Congress by September 1,
1999. 


--------------------
\12 Asset visibility is intended to provide defense personnel with
timely and accurate information on the location, movement, status,
and identity of units, personnel, equipment, and supplies across all
DOD components. 

\13 In its plan, DOD also sets an indicator of reducing secondary
item inventories to $48 billion by 2003. 


   CONCLUSIONS
------------------------------------------------------------ Letter :5

The Navy has not effectively controlled its in-transit inventory,
leaving significant amounts of inventory unaccounted for. 
Significant weaknesses exist at all levels of the Navy's in-transit
inventory management structure.  These weaknesses lead to potential
theft or undetected losses of items and demonstrate inefficient and
ineffective logistics management practices such as potentially
shipping or buying unnecessary inventory.  These weaknesses and the
problems they create are primarily a result of the failure of the
Navy to follow its own policies and procedures regarding controls of
in-transit inventory.  Further, significant problems exist in data
reporting systems. 


   RECOMMENDATIONS
------------------------------------------------------------ Letter :6

In conjunction with developing a statutorily required, comprehensive
plan to address visibility over in-transit inventory, DOD should take
a number of immediate steps to improve controls over the Navy's
in-transit inventory.  Specifically, we recommend that the Secretary
of Defense direct the Secretary of the Navy to do the following: 

  -- Comply with existing DOD and Navy procedures regarding material
     receipt acknowledgment of in-transit shipments and reemphasize
     follow-up procedures on unconfirmed warehoused and purchased
     material receipts. 

  -- Modify the Navy's integrated accounting and logistics systems so
     that they routinely update both financial and inventory records
     when in-transit inventory items are received.  Until the systems
     are operational, NAVICP Philadelphia should establish routine
     reconciliation procedures for their supply and financial records
     to ensure oversight and control over in-transit inventory items. 

  -- Specifically target in-transit inventory problems as an issue
     for review in Federal Managers' Financial Integrity Act
     assessments. 

  -- Establish performance measures, milestones, and timetables to
     help monitor the progress being made to reduce the vulnerability
     of in-transit inventory to undetected loss or misplacement. 


   AGENCY COMMENTS AND OUR
   EVALUATION
------------------------------------------------------------ Letter :7

In written comments on a draft of this report, DOD agreed with all of
our recommendations and stated that the Navy had taken immediate
steps to improve in-transit inventory.  The Commander, Naval Supply
Systems Command, has chartered an Integrated Process Team to review
current systems, policies, and processes to investigate material
receipt acknowledgment problems and proposed short-term solutions. 
The Commander has also chartered a team to review in-transit
practices of the other services and of commercial activities in order
to reengineer the in-transit process.  The Naval Inventory Control
Point will include in-transit inventory accounting as part of its
fiscal year 1999 management control evaluation of internal controls
and report material weaknesses to NAVSUP by August 1, 1999.  DOD
further stated that the Commander, Naval Supply Systems Command, will
establish performance measures and a plan of action and milestones to
monitor progress being made to reduce the loss or misplacement of
shipments. 

Although DOD agreed with our recommendations, it stated that initial
research of the $3 billion in Navy inventory written off as lost
supports its belief that most of the material was actually received. 
A DOD official later said that DOD's belief was based on its review
of 410 lost warehoused material shipments at NAVICP Philadelphia in
fiscal year 1997.  According to the official, DOD found that 327 (80
percent) of the 410 shipments had been written off as lost even
though they had been received.\14 However, our review at NAVICP
Philadelphia indicated a different relationship between shipments
later accounted for and those actually lost.  Our review showed that
15 (16 percent) of the 94 warehoused shipments we sampled were
written off as lost despite the fact that their receipts were
recorded and that the Navy, after further investigation, could not
account for the whereabouts of the remaining 79 shipments. 

Although some of the items reported as lost may actually be in the
inventory, DOD does not have an adequate system for determining that
on an item-by-item basis.  Therefore, we continue to believe a
significant number of items are vulnerable to undetected theft or
loss.  Moreover, until this situation is resolved, these
discrepancies reduce the reliability of DOD inventory financial
reports, thus obscuring true inventory losses and misstating the
number of items on hand. 

We believe that the Navy's planned and ongoing initiatives to address
its in-transit inventory deficiencies are a step in the right
direction.  However, in conjunction with the steps taken to improve
controls over the Navy's in-transit inventory, DOD needs to develop
its plan for in-transit inventory and bring it to fruition.  DOD has
recently indicated that it will take an additional 6 months to
develop the statutorily required, comprehensive plan for its
in-transit inventory.  Because the act calls for us to review the DOD
plan and implementation, we will continue to monitor DOD's efforts to
develop its overall plan and be in a position to assess its
implementation. 

Appendix I contains the scope and methodology for this report, and
appendix II contains additional details on Navy procedures for
acknowledging and following up on receipts of in-transit inventory. 
DOD's written comments on this report are reprinted in their entirety
in
appendix III. 


--------------------
\14 No documentary evidence was available for us to validate this
information.  We asked the responsible NAVSUP official for
information about these 410 shipments and were told that this
information was based primarily on telephone calls and e-mail
messages by the issuing activities to intended recipients. 


---------------------------------------------------------- Letter :7.1

As arranged with your offices, unless you publicly announce its
contents earlier, we plan no further distribution of this report
until 30 days from its issue date.  At that time, we will send copies
of this report to Senator Daniel K.  Inouye, Senator Joseph I. 
Lieberman, Senator Carl Levin, Senator Ted Stevens, Senator Fred
Thompson, and Senator John Warner and to Representative Rod R. 
Blagojevich, Representative Dan Burton, Representative Jerry Lewis,
Representative John P.  Murtha, Representative Christopher Shays,
Representative Ike Skelton, Representative Floyd Spence, and
Representative Henry A.  Waxman in their capacities as Chair or
Ranking Minority Member, Senate and House Committees and
Subcommittees.  We are also sending copies of this report to The
Honorable William S.  Cohen, Secretary of Defense; The Honorable
Richard Danzig, Secretary of the Navy; Lieutenant General Henry T. 
Glisson, Director, DLA; and The Honorable Jacob J.  Lew, Director,
Office of Management and Budget.  Copies will also be made available
to others upon request. 


Please contact me at (202) 512-8412 if you have any questions.  The
major contributors to this report are listed in appendix IV. 

David R.  Warren, Director
Defense Management Issues


SCOPE AND METHODOLOGY
=========================================================== Appendix I

Our objectives for this report were to (1) identify the reported
value and types of inventory in transit within and between storage
and repair activities, vendors, and end users that were unaccounted
for (or lost) and (2) assess the Navy's adherence to procedures for
controlling such in-transit inventory. 

To assess the Navy's procedures for controlling in-transit inventory
and identify the reported types and amounts of in-transit items that
were not accounted for, we took the following steps: 

  -- We reviewed policies and procedures and obtained other relevant
     documentation related to in-transit inventory from officials at
     the Defense Logistics Management Standards Office, McLean,
     Virginia; the Defense Automated Addressing System Office,
     Dayton, Ohio; and the Naval Supply Systems Command (NAVSUP),
     Mechanicsburg, Pennsylvania. 

  -- We obtained financial reports of in-transit losses between
     October 1995 and September 1998 at NAVSUP.  Using the financial
     reports, we identified the Naval Inventory Control Point
     (NAVICP) Philadelphia as the Navy's inventory control activity
     with the highest reported dollar value of in-transit inventory
     losses.  At NAVICP Philadelphia, we obtained computerized
     inventory and financial records of in-transit losses between
     October 1996 and September 1997, the most current and complete
     in-transit information available.  Using the data, we
     judgmentally selected and reviewed 214 shipments of warehoused,
     purchased, and end-user material, valued at $9 million, that
     were reported as lost or not received.  We did not independently
     verify the overall accuracy of NAVICP Philadelphia's databases
     from which we obtained data but used them as a starting point
     for selecting shipments that we then tracked back to records and
     documents on individual transactions. 

  -- For each sample shipment, we reviewed available
     computer-generated shipment and receipt data, analyzed inventory
     records, and held discussions at the NAVICP Philadelphia,
     Pennsylvania; the Defense Distribution Depot, Fleet and
     Industrial Supply Center, Norfolk Naval Air Station, Norfolk,
     Virginia; and Oceana Naval Air Station, Virginia Beach,
     Virginia.  To learn whether issues associated with overdue
     shipments were adequately resolved, we reviewed Department of
     Defense, Navy, and NAVICP Philadelphia implementing guidance. 
     Such information provided the basis for conclusions regarding
     the controls over in-transit inventory.  To determine whether
     the Navy had emphasized in-transit inventory as part of its
     assessment of internal controls, we reviewed assessments from
     NAVICP Philadelphia for fiscal years 1995-97 and Navy
     Headquarters for fiscal years 1995-97. 

We performed our review between February 1998 and January 1999 in
accordance with generally accepted government auditing standards. 


ADDITIONAL DETAILS ON IN-TRANSIT
RECEIPT ACKNOWLEDGMENT AND
FOLLOW-UP PROCEDURES
========================================================== Appendix II

Figure II.1 shows the procedures the Navy is to follow to acknowledge
receipts and to follow up on delinquent receipts for shipments of
material to end users, figure II.2 shows these procedures for
shipments of warehoused material, and figure II.3 shows the
procedures for shipments of purchased material. 

   Figure II.1:  End-User Material
   Receipt Acknowledgment and
   Follow-up Procedures

   (See figure in printed
   edition.)

   Figure II.2:  Warehoused
   Material Receipt Acknowledgment
   and Follow-up Procedures

   (See figure in printed
   edition.)

   Figure II.3:  Purchased
   Material Receipt Acknowledgment
   and Follow-up Procedures

   (See figure in printed
   edition.)




(See figure in printed edition.)Appendix III
COMMENTS FROM THE DEPARTMENT OF
DEFENSE
========================================================== Appendix II



(See figure in printed edition.)



(See figure in printed edition.)



(See figure in printed edition.)


MAJOR CONTRIBUTORS TO THIS REPORT
========================================================== Appendix IV

NATIONAL SECURITY AND
INTERNATIONAL AFFAIRS DIVISION,
WASHINGTON, D.C. 

Charles I.  Patton, Jr.
Lawson (Rick) Gist, Jr.
James R.  Murphy

NORFOLK FIELD OFFICE

Sandra F.  Bell
Carleen C.  Bennett
Paul A.  Gvoth, Jr.
Joseph A.  Murray
Jeanett H.  Reid

KANSAS CITY FIELD OFFICE

Robert C.  Sommer


RELATED GAO PRODUCTS
============================================================ Chapter 0

Performance and Accountability Series:  Major Management Challenges
and Program Risks--Department of Defense (GAO/OCG-99-4, Jan.  1999). 

Department of Defense:  Financial Audits Highlight Continuing
Challenges to Correct Serious Financial Management Problems
(GAO/T-AIMD/NSIAD-98-158, Apr.  16, 1998). 

Department of Defense:  In-Transit Inventory (GAO/NSIAD-98-80R, Feb. 
27, 1998). 

Inventory Management:  Vulnerability of Sensitive Defense Material to
Theft (GAO/NSIAD-97-175, Sept.  19, 1997). 

High-Risk Series:  Defense Inventory Management (GAO/HR-97-5, Feb. 
1997). 

High-Risk Series:  Defense Financial Management (GAO/HR-97-3, Feb. 
1997). 


*** End of document. ***