Report No. DODIG-2016-036 Management Of Items In The .

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Report No. DODIG-2016-036I nspec tor Ge ne ralU.S. Department of DefenseDECEMBER 22, 2015Management of Items in theDefense Logistics Agency’sLong-Term StorageNeeds ImprovementI N T E G R I T Y E F F I C I E N C Y A C C O U N TA B I L I T Y E X C E L L E N C E

I N T E G R I T Y E F F I C I E N C Y A C C O U N TA B I L I T Y E X C E L L E N C EMissionOur mission is to provide independent, relevant, and timely oversightof the Department of Defense that supports the warfighter; promotesaccountability, integrity, and efficiency; advises the Secretary ofDefense and Congress; and informs the public.VisionOur vision is to be a model oversight organization in the FederalGovernment by leading change, speaking truth, and promotingexcellence—a diverse organization, working together as oneprofessional team, recognized as leaders in our field.Fraud, Waste & AbuseHOTLINEDepartment of Defensedodig.mil/hotline 8 0 0 . 4 2 4 . 9 0 9 8For more information about whistleblower protection, please see the inside back cover.

Results in BriefManagement of Items in the Defense Logistics Agency’sLong-Term Storage Needs ImprovementDecember 22, 2015Findings (cont’d)Objectivethat could have been reused. This occurred because DLAinappropriately excluded 12 categories of LTS inventoryfrom the automated recoupment process, and the processdid not identify all LTS items eligible for recoupment. As aresult, in 2014, DLA missed opportunities to offset or reducepurchases for items valued at 17.9 million that were alreadyin LTS inventory.We determined whether the DefenseLogistics Agency (DLA) was effectivelymanaging excess demilitarization (DEMIL)code B and sensitive DEMIL code Q itemsin Long-Term Storage (LTS). Specifically,we reviewed whether items assigned toLTS were justified and reused and whetherunneeded items were disposed of promptly.DEMIL code B items are munitions listitems that are defense-related property formilitary use, and sensitive DEMIL code Qitems are commerce control list items.FindingsDLA did not effectively manageLTS inventory. Specifically, DLA storeditems in LTS inventory that exceededhistorical demand and, therefore, werenot justified for retention. This occurredbecause although a policy memorandumdirected DLA to review LTS items forcontinued retention after 24 months, thepolicy did not specify how to determineacceptable inventory levels for those items.As a result, DLA unnecessarily incurredcosts to store 768,571 LTS inventory items,valued at 169.5 million, that far exceededthe historical demand.In addition, in 2014, DLA reused216,003 LTS inventory items, valued at 55.4 million, through its automated processto identify items for reuse (automatedrecoupment). However, DLA’s process didnot identify 87,135 LTS inventory itemsRecommendationsWe recommend that the Director, DLA: in coordination with the Assistant Secretary of Defensefor Logistics and Materiel Readiness, implement a policyto establish a demand-based inventory managementprocess for LTS inventory; determine acceptable inventory levels for LTS itemsbased on the revised guidance and dispose of inventoryitems that exceed those inventory levels; update the automated recoupment process toeliminate excluded categories and ensure all items areappropriately recouped from LTS inventory; and determine why eligible LTS inventory items are notautomatically recouped and correct those deficiencies inthe automated recoupment process.Management Commentsand Our ResponseThe Deputy Director, DLA Logistics Operations, respondingfor the Director, DLA, addressed all specifics of therecommendations, and no further comments are required.Please see the Recommendations Table on the next page.Visit us at www.dodig.milDODIG-2016-036 (Project No. D2015-D000RD-0087.000) i

Recommendations TableRecommendationsRequiring CommentManagementDirector, Defense Logistics Agencyii DODIG-2016-036 (Project No. D2015-D000RD-0087.000)NoneNo AdditionalComments RequiredA.1, A.2, B.1, B.2

INSPECTOR GENERALDEPARTMENT OF DEFENSE4800 MARK CENTER DRIVEALEXANDRIA, VIRGINIA 22350-1500MEMORANDUM FOR ASSISTANT SECRETARY OF DEFENSE FOR LOGISTICSAND MATERIEL READINESSDIRECTOR, DEFENSE LOGISTICS AGENCYDecember 22, 2015SUBJECT: Management of Items in the Defense Logistics Agency’s Long-Term StorageNeeds Improvement (Report No. DODIG-2016-036)We are providing this report for your information and use. The Defense Logistics Agencystored items in long-term storage inventory that exceeded historical demand and thereforeincurred costs to store 169.5 million in excess inventory. In addition, the Defense LogisticsAgency did not recoup all long-term storage inventory that could have been reused, resultingin 17.9 million worth of unnecessary inventory purchases from contractors in 2014. Weconducted this audit in accordance with generally accepted government auditing standards.We considered management comments on a draft of this report when preparing thefinal report. Comments from the Deputy Director, Defense Logistics Agency LogisticsOperations, responding for the Director, Defense Logistics Agency, addressed all specificsof the recommendations and conformed to the requirements of DoD Instruction 7650.03;therefore, we do not require additional comments.We appreciate the courtesies extended to the staff. Please direct questions to me at(703) 699‑7331 (DSN 499-7331).Carol N. GormanAssistant Inspector GeneralReadiness and Cyber OperationsDODIG-2016-036 iii

ContentsIntroductionObjective 1Background 1Review of Internal Controls 3Finding A. Long-Term Storage Inventory ExceededHistorical Demand 4Stock Levels Exceeded Historical Demand 4Inventory Retained Regardless of Demand Quantity 5Unnecessary Storage Costs 6Recommendations, Management Comments, and Our Response 6Finding B. DLA Could Have Recouped AdditionalLTS Inventory 8LTS Inventory Automatically Recouped 8LTS Inventory Not Identified for Recoupment 9Inventory Categories Inappropriately Excluded 9Process Did Not Identify all LTS Items Eligible for Automated Recoupment 10Unnecessary Purchases 11Recommendations, Management Comments, and Our Response 11AppendixesAppendix A. Scope and Methodology 13Use of Computer-Processed Data 14Use of Technical Assistance 15Prior Coverage 15Appendix B. Definitions of Items Excluded From Automated Recoupment 16Management CommentsDefense Logistics Agency 18Acronyms and Abbreviations 20iv DODIG-2016-036

IntroductionIntroductionObjectiveOur audit objective was to determine whether the Defense Logistics Agency (DLA)was effectively managing excess demilitarization (DEMIL)1 code B and sensitiveDEMIL code Q items2 in Long-Term Storage (LTS). Specifically, we reviewedwhether items assigned to LTS were justified and reused, and whether unneededitems were disposed of promptly. See Appendix A for a discussion of the scope andmethodology related to the objective.BackgroundOn November 14, 2008, the Deputy Under Secretary of Defense for Logistics andMateriel Readiness issued a policy memorandum3 that directed DLA to establishthe LTS program. The LTS program was established to strengthen controls over,and minimize future security risks associated with the disposition of DEMILcode B and sensitive DEMIL code Q items. Because of those items’ security risksand sensitivity, the memorandum required that DEMIL code B and code Q itemsbe available for reuse only within DoD, the Foreign Military Sales programs, otherFederal agencies, and designated special programs.In January 2009, DLA opened an LTS facility in Columbus, Ohio, to receive, store,and process for reuse, excess DEMIL code B and sensitive DEMIL code Q items thathad been turned in by DLA and the Military Services for disposition. In May 2012,DLA began to retain some DEMIL code B and code Q inventory at their distributiondepots rather than transfer the items to the Columbus LTS facility because thefacility was nearing capacity. Although stored at DLA distribution depots, the LTSinventory was owned by the LTS program and listed on the LTS inventory records.On July 12, 2013, the Assistant Secretary of Defense for Logistics and MaterielReadiness (ASD[L&MR])4 issued an updated LTS policy memorandum. 5 Thememorandum directs DLA, in coordination with the Military Services, to continue1A DEMIL code is assigned to DoD personal property to indicate the degree of required physical destruction and toidentify items that require specialized handling or procedures.2DEMIL code B items are munitions list items that are defense-related property specifically designed, developed,configured, adapted, or modified for military use. DEMIL code Q items are commerce control list items designated asnonsensitive or sensitive based on control criteria established by the Department of Commerce.3Deputy Under Secretary of Defense for Logistics and Materiel Readiness memorandum “Materiel Disposition PolicyChange Concerning F-14 Parts, Demilitarization (DEMIL) Code B Munitions List Items (MLI), and Demilitarization Code QCommerce Control List Items (CCLI),” November 14, 2008.4In the National Defense Authorization Act for FY 2010, Congress changed the Deputy Under Secretary for Logistics andMateriel Readiness title to ASD(L&MR).5ASD(L&MR) memorandum, “Materiel Disposition Policy Concerning F-14 Parts, Demilitarization (DEMIL) Code BMunitions List Items (MLI), and Demilitarization Code Q Commerce Control List Items (CCLI),” July 12, 2013.DODIG-2016-036 1

Introductionto store and manage excess DEMIL code B and sensitive DEMIL code Q items inLTS. In addition, the memorandum directs DLA to review LTS inventory items after24 months and mutilate and sell as scrap or dispose of items not needed.As of November 2014, LTS inventory was stored at the Columbus LTS facility andthe 17 DLA distribution depots located within the continental United States. Thetotal LTS inventory consisted of 3.5 million inventory items (68,534 unique nationalitem identification numbers6 [NIIN]), valued at 1.6 billion.Roles and ResponsibilitiesThe ASD(L&MR) serves as the principal staff assistant and advisor on logisticsand materiel readiness matters to the Under Secretary of Defense for Acquisition,Technology, and Logistics; the Deputy Secretary of Defense; and the Secretaryof Defense. The ASD(L&MR) issues policies and procedures for logistics,maintenance, materiel readiness, strategic mobility, and sustainment support inDoD that includes supply, maintenance, and transportation. ASD(L&MR) overseesHeadquarters DLA at Fort Belvoir, Virginia.Headquarters DLA: DLA DS: 6782 DODIG-2016-036provides the Military Services, other federal agencies, and partnernation armed forces with a full spectrum of logistics, acquisition,and technical services;supplies nearly 90 percent of the military’s spare parts;manages the reuse of military equipment;provides other services to the military and federal agencies; andoversees DLA Disposition Services (DS) at Battle Creek, Michigan.is a subordinate organization to DLA;administers DoD’s excess personal property7 disposal program;{{the program helps agencies dispose of unneeded excess propertythrough reuse, transfer, donation, sale, or disposal;8 andstores LTS inventory at the Columbus LTS facility and manages LTSinventory at that facility and at the distribution depots.A NIIN is the last nine digits of an item’s national stock number that uniquely identifies each supply item.All references to property in this report are personal property. DoD personal property is property other than realproperty and records of the Federal Government.DEMIL Code B and sensitive Q items cannot be sold, transferred, or donated to the public.

IntroductionDLA Automated Recoupment ProcessDLA identifies LTS inventory items that can be reused through its “automatedrecoupment” process.9 The automated recoupment process (Figure 1) runsnightly in DLA’s Enterprise Business System (EBS) to determine whether DLArequirements can be met with existing LTS inventory. Through this process, DLAcan avoid new purchases, fill backorders, and maintain its levels of on-hand stockat the depots.Figure 1. DLA Automated Recoupment Process for LTS Inventory* Material excluded from automated recoupment: Shelf Life, Flight Safety, Life Support, Customer-DirectLong-Term Contract, Obsolete, Local Purchase, Nonstocked, Semi-Active, Special Procedure, Hazardous,First-Article Test, and Exclusion items.Review of Internal ControlsDoD Instruction 5010.4010 requires DoD organizations to implement acomprehensive system of internal controls that provides reasonable assurancethat programs are operating as intended and to evaluate the effectiveness of thecontrols. We identified internal control weaknesses with the management ofthe LTS inventory. Specifically, DLA stored items in LTS that exceeded historicaldemand and, therefore, were not justified for retention. Additionally, DLA’sautomated recoupment process did not identify all LTS inventory that couldhave been recouped. We will provide a copy of this report to the senior officialresponsible for internal controls in DLA.910DLA can also identify LTS items for reuse through a manual recoupment process. DoD, the Foreign Military Salesprograms, other Federal agencies, and designated special programs can only obtain LTS inventory through themanual process.DoD Instruction 5010.40, “Managers’ Internal Control Program Procedures,” May 30, 2013.DODIG-2016-036 3

Finding AFinding ALong-Term Storage Inventory ExceededHistorical DemandDLA did not effectively manage LTS inventory. Specifically, DLA stored items inLTS inventory that exceeded historical demand and, therefore, were not justifiedfor retention. This occurred because although the policy memorandum, datedJuly 12, 2013, directed DLA to review LTS items for continued retention after24 months, the policy did not specify how to determine acceptable inventorylevels for those items. Therefore, DLA retained all quantities of an LTS item ifthere was any demand for the item within the preceding 24 months, to includedemand for as few as one item. As a result, DLA unnecessarily incurred costs tostore 768,571 LTS inventory items (3,046 NIINs), valued at 169.5 million, that farexceeded the historical demand.Stock Levels Exceeded Historical DemandDLA stored quantities of DEMIL code B and sensitive DEMIL code Q NIINs inLTS inventory that far exceeded historical demand and, therefore,were not justified for retention. We compared the quantity ofitems in the November 2014 LTS inventory to the historicalDLA storeddemand for those NIINs. To establish the historicalquantities ofdemand, we identified LTS inventory that was reusedDEMIL code B andsensitive DEMIL code Qduring a 24-month period (2013 through 2014) and DLANIINs in LTS inventory thatpurchases during a 12-month period (2014) for the samefar exceeded historicalNIINs. We were conservative and used a multiplicationdemand and, therefore,factor of five times the historical demand to determine awere not justified for“reasonable” inventory level for LTS items. In summary,retention.we determined that 768,571 inventory items (3,046 NIINs),valued at 169.5 million, were stored in excess of five times thehistorical demand for those NIINs.4 DODIG-2016-036

Finding AFor example, a kit (NIIN 00‑608-2271) used to repair the tracks of the M-88 series A2,HERCULES11 had a demand of one item from 2013 through 2014. Using a demandmultiplier of five, DLA would have established an inventory level of five items.However, there were 70,769 kits, valued at 4.5 million, in LTS inventory as ofNovember 2014, which far exceeded historical demand.In another example, an electrical cable assembly (NIIN 00-255-8332) used forcontainerized maintenance facilities12 had a demand of 33 items from 2013through 2014. Using a demand multiplier of five, DLA would have establishedan inventory level of 165 items. However, there were 5,468 cable assemblies,valued at 9 million, in LTS inventory as of November 2014, which far exceededhistorical demand.In another example, a shaft diaphragm (NIIN 00-460-5167) used on the KC-135aircraft had a demand of one from 2013 through 2014. Using a demand multiplierof five, DLA would have established an inventory level of five items. However,there were 1,159 shaft diaphragms, valued at 1.3 million, in LTS inventory as ofNovember 2014, which far exceeded historical demand.Inventory Retained Regardless of Demand QuantityDLA retained all quantities of an LTS item if there was any demand for the itemwithin the preceding 24 months, to include demand for as few as one item. TheASD(L&MR) policy memorandum, dated July 12, 2013, directs DLA to review LTSitems for continued retention after 24 months; however, the policy did not specifyhow to determine acceptable inventory levels for those items.As a result of our audit, in April 2015, Office of the ASD(L&MR) and DLA personneldiscussed revising the July 2013 policy memorandum to allow DLA more authorityto store and manage LTS inventory levels based on historical demand. ASD(L&MR)stated that DLA had authority to implement policy to address the managementof LTS inventory. However, as of September 2015, DLA had not issued a new LTSinventory management policy. The Director, DLA, in coordination with ASD(L&MR),should implement a policy to establish a demand-based inventory managementprocess for LTS inventory. In addition, DLA should determine acceptable inventorylevels for LTS items based on the revised policy and dispose of any inventory itemsthat are in excess of those levels.11HERCULES (Heavy Equipment Recovery Combat Utility Lift and Evacuation System) is a fully-tracked, heavy armoredvehicle that can tow or lift heavy machinery from the battlefield weighing up to 70 tons.12A containerized maintenance facility is stand-alone maintenance support package that may be tailored to meetmission needs.DODIG-2016-036 5

Finding AUnnecessary Storage CostsBy retaining unjustified amounts of LTS inventory, DLA unnecessarily incurredcosts to store 768,571 LTS inventory items13 (3,046 NIINs), valued at 169.5 million.Although we used a demand multiplier of five, unnecessary storage costs14 wouldbe higher if DLA determines the demand multiplier for LTS inventory shouldbe lower. For example, using a demand multiplier of two, DLA would haveunnecessarily incurred costs to store 950,875 LTS inventory items (5,320 NIINs),valued at 233.9 million. Regardless of the demand multiplier used, if DLA doesnot establish a demand multiplier, determine acceptable inventory levels based onthat multiplier, and reduce its LTS inventory levels accordingly, DLA will continueto incur unnecessary LTS inventory storage costs.15Recommendations, Management Comments,and Our ResponseRecommendation A.1We recommend t

AND MATERIEL READINESS DIRECTOR, DEFENSE LOGISTICS AGENCY SUBJECT: Management of Items in the Defense Logistics Agency’s Long-Term Storage Needs Improvement (Report No. DODIG-2016-036) We are providing this report for your information and use. The Defense Logistics Agency

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