Defense Inventory:

Army Needs to Strengthen Internal Controls for Items Shipped to Repair Contractors

GAO-06-209: Published: Dec 13, 2005. Publicly Released: Dec 13, 2005.

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GAO has previously reported that the lack of control over inventory shipments increases the Department of Defense's (DOD) vulnerability to undetected loss or theft. GAO evaluated the Army's effectiveness in maintaining accountability of inventory shipped to repair contractors. To conduct its review, GAO analyzed shipment data for fiscal year 2004, surveyed repair contractors that were recipients of inventory shipments, and assessed the Army's adherence to internal control procedures. Inventory shipments included both secondary repair items--components, assemblies, and subassemblies, other than major end items, which may be sent to commercial facilities for repair, alteration, or modification--and government-furnished materiel--assemblies, parts, and other items provided in support of this work.

The Army has not maintained accurate accountability for inventory shipped to repair contractors, thereby placing these assets at risk of loss or theft. Although DOD policy requires the military services to confirm receipt of all assets shipped to contractors, the Army is not consistently recording shipment receipts in its inventory management systems. In an analysis of fiscal year 2004 shipment data obtained from two Army inventory control points, GAO could not reconcile shipment records with receipt records for 42 percent of the unclassified secondary repair item shipments, with a value of $481.7 million, or for 37 percent of the classified secondary repair item shipments, with a value of $8.1 million. These data show that the Army cannot confirm that all inventory items shipped to repair contractors were received. The Army's data contained no receipts for government-furnished materiel. GAO survey results showed that repair contractors could confirm receipt of most, but not all, of the shipments. Specifically, on the basis of its survey results and follow-up work, GAO estimated that about 15 percent of the unclassified secondary repair item shipments in the survey population could not be confirmed as being received. GAO estimated that these lost or unaccounted for shipments have a value of approximately $68 million. All shipments of classified government-furnished materiel and secondary repair items were reported as received by the contractors in our survey. For shipments of unclassified government-furnished materiel, almost all shipments were reported by the contractors in our survey as being received. The Army's accountability for shipments of items sent to repair contractors is impeded by three internal control weaknesses. First, Army inventory control points lack systematic procedures for (1) obtaining and documenting contractor receipt of shipments of secondary repair items, (2) following up in cases where receipt was not confirmed by the contractors, and (3) providing advance notification of shipments to contractors. Second, the Army does not confirm receipt of government-furnished materiel shipments, reflecting a discrepancy between the Army's practices and DOD regulations regarding the need to confirm receipt of these shipments. DOD regulations require receipts for all shipments, including government-furnished materiel. Third, inventory control points do not provide the Defense Contract Management Agency with required quarterly reports that show the status of government-furnished materiel shipments. As a result, Defense Contract Management Agency officials may lack data to corroborate contractor-generated data during their inventory audits. These weaknesses in the Army's ability to account for inventory shipped to repair contractors increase the risk of undetected loss or theft. Moreover, inaccurate receipt records can diminish asset visibility and distort on-hand inventory balances, leading to unnecessary procurement of items.

Recommendations for Executive Action

  1. Status: Closed - Implemented

    Comments: Recommendation closed as implemented based on ongoing data cleansing efforts and Army's plans to continue doing so until all sites are using LMP.

    Recommendation: To improve accountability of inventory shipped to Army repair contractors, the Secretary of Defense should direct the Secretary of the Army to instruct the Commanding General, Army Materiel Command, to analyze receipt records for secondary repair items shipped to contractors and take actions necessary to update and adjust inventory management data prior to transfer to the Logistics Modernization Program. These actions should include investigating and resolving shipments that lack matching receipts to determine their status.

    Agency Affected: Department of Defense

  2. Status: Closed - Implemented

    Comments: Recommendation closed as implemented due to actions taken to examine the feasibility of implementing DOD guidance and the Army's subsequent efforts to include this functionality in its centralized contractor receipt system.

    Recommendation: To improve accountability of inventory shipped to Army repair contractors, the Secretary of Defense should direct the Secretary of the Army to instruct the Commanding General, Army Materiel Command, to examine the feasibility of implementing DOD guidance for providing advance notification to contractors at the time of shipment and, if warranted, establish appropriate policies and procedures for implementation.

    Agency Affected: Department of Defense

  3. Status: Closed - Implemented

    Comments: Recommendation closed as implemented based on interim Army guidance to issue quarterly status report to the Defense Contract Management Agency.

    Recommendation: To improve accountability of inventory shipped to Army repair contractors, the Secretary of Defense should direct the Secretary of the Army to instruct the Commanding General, Army Materiel Command, to provide quarterly status reports of all shipments of Army government-furnished materiel to the Defense Contract Management Agency, in compliance with DOD regulations.

    Agency Affected: Department of Defense

  4. Status: Closed - Not Implemented

    Comments: The Army cited actions it intends to take to implement this recommendation; however, actions are not expected to be instituted until 2011.

    Recommendation: To improve accountability of inventory shipped to Army repair contractors, the Secretary of Defense should direct the Secretary of the Army to instruct the Commanding General, Army Materiel Command, to institute policies, consistent with DOD regulations, for obtaining and documenting contractors' receipt of government-furnished materiel shipments in the Army's inventory management systems.

    Agency Affected: Department of Defense

  5. Status: Closed - Not Implemented

    Comments: The Army cited actions it intends to take to implement this recommendation; however, actions are not expected to be instituted until 2011.

    Recommendation: To improve accountability of inventory shipped to Army repair contractors, the Secretary of Defense should direct the Secretary of the Army to instruct the Commanding General, Army Materiel Command, to establish systematic procedures to obtain and document contractors' receipt of secondary repair item shipments in the Army's inventory management systems, and to follow up on unconfirmed receipts within 45 days of shipment.

    Agency Affected: Department of Defense

  6. Status: Closed - Not Implemented

    Comments: The Army cited actions it intends to take to implement this recommendation; however, actions are not expected to be instituted until 2011.

    Recommendation: To improve accountability of inventory shipped to Army repair contractors, the Secretary of Defense should direct the Secretary of the Army to instruct the Commanding General, Army Materiel Command, to to ensure consistent implementation of any new procedures arising from the recommendations in this report, provide periodic training to appropriate inventory control point personnel and provide clarifying guidance concerning these new procedures to the command's repair contractors.

    Agency Affected: Department of Defense

 

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