Defense Inventory: Status of Navy Initiatives to Improve Its In-Transit
Inventory Process (Correspondence, 08/24/2000, GAO/OSI/NSIAD-00-243R).

Pursuant to a congressional request, GAO provided a status report on the
Navy's initiatives to address a number of in-transit inventory problems
that GAO identified in previous reports.

GAO noted that: (1) the Commander, Naval Supply Systems Command, has
communicated the importance of the proper and timely posting of receipts
and the prompt and accurate response to follow-up requests; (2) the
Supply Systems Command's Integrated Process Team has designed an
initiative known as "Brute Force" to provide temporary improvements in
the manual reconciliation process until automated programming changes
can be made; (3) according to the Navy's Office of Financial Operations,
the Naval Inventory Control Point reviewed selected aspects of shipped
inventory during its fiscal year (FY) 1999 management control review
pursuant to the Federal Managers' Financial Integrity Act of 1982; (4)
the Naval Supply Systems Command established goals at the Naval
Inventory Control Point to reduce FY 2000 write-offs and gain better
control of classified, sensitive, and high-dollar value warehoused
material; (5) progress toward attaining these goals is assessed monthly
by the Commander, Naval Supply Systems Command; (6) the Naval Supply
Systems Command also added in-transit metrics to its Corporate
Information System as part of its efforts to reengineer the Navy's
in-transit process; (7) according to Navy officials, the Corporate
Information System is available on the Web and provides users with data
analysis tools, enabling them to quickly identify problem areas or
activities so that focused corrective actions can be taken; (8) the
metrics in place provide various levels of aggregation dependent on user
menu selection; (9) according to Supply Systems Command officials, the
Integrated Process Team briefs the Commander, Vice Commander, and
Executive Director of the Naval Supply Systems Command about the metrics
on a monthly basis; and (10) these briefings address timely issues using
the implemented metrics, and the metrics are continuously reviewed and
revised as necessary to ensure that the proper management attention is
being paid to the in-transit process.

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

 REPORTNUM:  OSI/NSIAD-00-243R
     TITLE:  Defense Inventory: Status of Navy Initiatives to Improve
	     Its In-Transit Inventory Process
      DATE:  08/24/2000
   SUBJECT:  Military inventories
	     Inventory control systems
	     Internal controls
	     Logistics

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GAO/OSI/NSIAD-00-243R

GAO/ OSI/ NSIAD- 00- 243R Navy In- Transit Inventory Initiatives

United States General Accounting Office Washington, DC 20548

Office of Special Investigations

B- 285977 August 24, 2000 The Honorable Richard Durbin The Honorable Tom
Harkin United States Senate

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

Subject: Defense Inventory: Status of Navy Initiatives to Improve Its In-
Transit Inventory Process

In response to your May 18, 2000, request, we are providing a status report
on the Navy's initiatives to address, at least in part, a number of in-
transit inventory problems that we identified in recent reports. 1 The
information in this letter is based on what the Navy has reported to us as
the specific actions it has taken to address the recommendations that we
made in our March 1999 report. Concerns about the vulnerability of inventory
shipments to fraud, waste, and abuse led the Congress to enact section 349
of the Strom Thurmond National Defense Authorization Act for Fiscal Year
1999 (P. L. 105- 261), which requires the Department of Defense to develop a
comprehensive plan for tracking inventory while it is being shipped. We are
currently reviewing the Department of Defense's implementation of its
departmentwide plan to address in- transit inventory management problems and
will be reporting on our findings this fall.

Results In Brief

In response to our recommendations, the Navy has reported a number of
actions that, as specified below, are complete or in process. Overall, we
are encouraged by the set of actions and believe that once they are fully
implemented, short and long- term improvements in inventory management will
result. We are particularly encouraged by the Navy's plan to reengineer its
processes to create long- term system solutions.

1 Department of the Navy: Breakdown of In- Transit Inventory Process Leaves
It Vulnerable to Fraud (GAO/ OSI/ NSIAD- 00- 61, Feb. 2, 2000) and Defense
Inventory: Navy's Procedures for Controlling InTransit Items Are Not Being
Followed( GAO/ NSIAD- 99- 61, Mar. 31, 1999).

B- 285977 GAO/ OSI/ NSIAD- 00- 243R Navy In- Transit Inventory Initiatives
Page 2

Recommendations and Reported Actions

Recommendation 1 The Navy should comply with existing Department of Defense
and Navy procedures regarding material receipt acknowledgment of in- transit
shipments and reemphasize follow- up procedures on unconfirmed warehouse and
purchased material.

According to Department of Defense comments on our report, the Commander,
Naval Supply Systems Command, has communicated the importance of the proper
and timely posting of receipts and the prompt and accurate response to
follow- up requests. Additionally, the Commander has chartered an Integrated
Process Team to look at current systems, policies, and processes to
investigate material receipt acknowledgement problems and proposed short-
term solutions. Department of Defense officials also stated that the long-
term solution to noncompliance with receipt and follow- up procedure would
be to reengineer the entire in- transit process to include automation,
elimination of errors, metrics to monitor the process, and incorporation of
best business practices.

Recommendation 2 The Navy should modify its 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, the Naval Inventory Control Point in Philadelphia,
Pennsylvania, should establish routine reconciliation procedures for their
supply and financial records to ensure oversight and control over in-
transit inventory items.

The Supply Systems Command's Integrated Process Team has designed an
initiative known as “Brute Force” to provide temporary
improvements in the manual reconciliation process until automated
programming changes can be made. Brute Force involves the reallocation and
increase in staff to (1) resolve unconfirmed receipts of warehoused material
earlier, thereby avoiding potential write- offs; (2) reconcile in- transit
write- offs of classified items with inventory records; and (3) perform
causative research and analysis of write- offs of warehoused material.

The Brute Force team reportedly tracks and investigates unconfirmed receipts
of warehoused material shipments valued at over $300,000 and unconfirmed
receipts of warehoused material shipments containing classified items. To
date in fiscal year 2000, the Brute Force team reports successfully
resolving 1,328 unconfirmed receipts of warehoused material at a reported
valued at $547.2 million, thus avoiding their write- off.

B- 285977 GAO/ OSI/ NSIAD- 00- 243R Navy In- Transit Inventory Initiatives
Page 3 The Brute Force team also performed research and analysis to
determine the cause of

fiscal year 1999 warehoused material written off as lost at the Naval
Inventory Control Point in Philadelphia. Based on its research and analysis,
the team reported confirming that the Navy had written off as lost 8,542
shipments of warehoused material (valued at $143.3 million) that had
actually been received by the intended recipients. These discrepancies
reduced the reliability of inventory reports, obscured true inventory
losses, and misstated the number of items on hand. As of August 2000, Brute
Force team personnel had corrected $82.5 million of the $143.3 million in
writeoff errors by reversing the write- offs and properly entering receipts
for the shipments into Navy records.

Using data compiled from its results, the Brute Force team compiled summary
data on inventory shipment losses that highlighted breakdowns in the
physical distribution process and provided the team a means of assessing the
effectiveness of the Navy's policies and procedures governing shipped
inventory. For example, the compilation of such data facilitated the Supply
Systems Command's ability to identify the predominant causes of shipped
inventory losses, such as internal, customer procedure, and receipt-
reporting process problems.

Recommendation 3 The Navy should specifically target in- transit inventory
problems as an issue for review in Federal Managers' Financial Integrity Act
assessments.

According to the Navy's Office of Financial Operations, the Naval Inventory
Control Point reviewed selected aspects of shipped inventory during its
fiscal year 1999 management control review pursuant to the Federal Managers'
Financial Integrity Act of 1982. In a September 1, 1999, letter to the Chief
of Naval Operations, the Vice Commander, Naval Supply Systems Command,
identified material weaknesses in Naval Inventory Control Point internal
controls over shipped inventory. The Vice Commander's letter also outlined
planned corrective actions, including milestones and timetables for
completion. The corrective actions include (1) the identification and
implementation of metrics to improve monitoring and performance measurement
of the in- transit process, (2) automated program changes to improve
visibility of sensitive items, (3) proof of shipment and delivery
confirmation, and (4) evaluation of commercial practices and the in- transit
processes of other military services. The corrective actions have an
estimated completion date of December 2000.

Recommendation 4 The Navy should 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.

B- 285977 GAO/ OSI/ NSIAD- 00- 243R Navy In- Transit Inventory Initiatives
Page 4 The Naval Supply Systems Command established four goals at the Naval
Inventory

Control Point to reduce fiscal year 2000 write- offs and gain better control
of classified, sensitive, and high- dollar value warehoused material. The
goals, based on the number, value, and types of unconfirmed receipts of
warehoused material shipments follow:

ï¿½ Eighty percent of all unconfirmed receipts of warehoused material
shipments (valued at over $350,000) should be resolved within 180 days from
the date the material was issued.

ï¿½ All unconfirmed receipts of sensitive warehoused material shipments should
be resolved within 180 days from the date the material was issued.

ï¿½ All unconfirmed receipts of classified warehoused material shipments
should be resolved within 120 days from the date the material was issued.

ï¿½ The value of fiscal year 2000 warehoused material write- offs should be 30
percent less than the value of fiscal year 1999 warehoused material write-
offs.

Progress toward attaining these goals is assessed monthly by the Commander,
Naval Supply Systems Command.

The Naval Supply Systems Command also added in- transit metrics to its
Corporate Information System as part of its efforts to reengineer the Navy's
in- transit process. According to Navy officials, the Corporate Information
System is available on the Web and provides users with data analysis tools,
enabling them to quickly identify problem areas or activities so that
focused corrective actions can be taken. The metrics in place provide
various levels of aggregation dependent on user menu selection. Two metrics
available in the Corporate Information System, along with additional
aggregations specific to each metric, include

ï¿½ dollar value and number of unconfirmed receipts of warehoused material,
with additional aggregations involving separate receipt and issue
transactions and the capability to sort by the activity that reports the
issue or receipt and

ï¿½ dollar value and number of inventory adjustments (e. g., incoming shipment
and warehoused material write- offs), with additional aggregations involving
the capability to sort by budget project and by the activity that processes
the inventory adjustment.

Metrics have also been implemented to measure the follow- up process for
aged transactions (i. e., backlogs of warehoused material discrepancy
reports at each activity). The user can sort the data by budget project (e.
g., Navy Working Capital Fund), receipt or issue transaction, action holder,
and material classification. The information can be further stratified by
overall document age, dollar value, and

B- 285977 GAO/ OSI/ NSIAD- 00- 243R Navy In- Transit Inventory Initiatives
Page 5 response code. The response code provides the user with the cause of
the

unconfirmed warehoused- material receipt, which is extremely valuable in
analyzing the in- transit process and identifying systemic problems.

According to Supply Systems Command officials, the Integrated Process Team
briefs the Commander, Vice Commander, and Executive Director of the Naval
Supply Systems Command about the metrics on a monthly basis. These briefings
address timely issues using the implemented metrics, and the metrics are
continuously reviewed and revised as necessary to ensure that the proper
management attention is being paid to the in- transit process.

Agency Comments

Senior- level logistics and supply officials of the Naval Supply Systems
Command provided comments on a draft of this letter. The officials agreed
with the facts presented and provided some clarifications. We revised our
letter as appropriate.

Scope and Methodology

To determine the Navy's progress in addressing our March 1999
recommendations, we held discussions with Naval Supply Systems Command
officials in Mechanicsburg, Pennsylvania. To determine whether the Navy had
emphasized intransit inventory as part of its assessment of internal
controls, we reviewed assessments from the Naval Supply Systems Command for
fiscal year 1999.

-----

B- 285977 GAO/ OSI/ NSIAD- 00- 243R Navy In- Transit Inventory Initiatives
Page 6 We are sending copies of this letter to the appropriate congressional
committees; the

Honorable William S. Cohen, Secretary of Defense; the Honorable Richard
Danzig, Secretary of the Navy; and the Honorable Jacob J. Lew, Director,
Office of Management and Budget. Copies of this letter will also be made
available to others upon request. If you have any questions regarding this
letter, please call Robert Hast at (202) 512- 6722 or David Warren at (202)
512- 8412. Key contributors to this letter include John Ryan, Norman M.
Burrell, Lawton Gist, and Sandra F. Bell.

Robert H. Hast David R. Warren Assistant Comptroller General Director,
Defense Management

for Special Investigations National Security and International Office of
Special Investigations Affairs Division

(600674)
*** End of document. ***