<DOC> [109th Congress House Hearings] [From the U.S. Government Printing Office via GPO Access] [DOCID: f:22905.wais] DOD EXCESS PROPERTY SYSTEMS: THROWING AWAY MILLIONS ======================================================================= HEARING before the SUBCOMMITTEE ON NATIONAL SECURITY, EMERGING THREATS, AND INTERNATIONAL RELATIONS of the COMMITTEE ON GOVERNMENT REFORM HOUSE OF REPRESENTATIVES ONE HUNDRED NINTH CONGRESS FIRST SESSION __________ JUNE 7, 2005 __________ Serial No. 109-51 __________ Printed for the use of the Committee on Government Reform Available via the World Wide Web: http://www.gpoaccess.gov/congress/ index.html http://www.house.gov/reform ______ U.S. GOVERNMENT PRINTING OFFICE 22-905 WASHINGTON : 2005 _____________________________________________________________________________ For Sale by the Superintendent of Documents, U.S. Government Printing Office Internet: bookstore.gpo.gov Phone: toll free (866) 512-1800; (202) 512ÿ091800 Fax: (202) 512ÿ092250 Mail: Stop SSOP, Washington, DC 20402ÿ090001 COMMITTEE ON GOVERNMENT REFORM TOM DAVIS, Virginia, Chairman CHRISTOPHER SHAYS, Connecticut HENRY A. WAXMAN, California DAN BURTON, Indiana TOM LANTOS, California ILEANA ROS-LEHTINEN, Florida MAJOR R. OWENS, New York JOHN M. McHUGH, New York EDOLPHUS TOWNS, New York JOHN L. MICA, Florida PAUL E. KANJORSKI, Pennsylvania GIL GUTKNECHT, Minnesota CAROLYN B. MALONEY, New York MARK E. SOUDER, Indiana ELIJAH E. CUMMINGS, Maryland STEVEN C. LaTOURETTE, Ohio DENNIS J. KUCINICH, Ohio TODD RUSSELL PLATTS, Pennsylvania DANNY K. DAVIS, Illinois CHRIS CANNON, Utah WM. LACY CLAY, Missouri JOHN J. DUNCAN, Jr., Tennessee DIANE E. WATSON, California CANDICE S. MILLER, Michigan STEPHEN F. LYNCH, Massachusetts MICHAEL R. TURNER, Ohio CHRIS VAN HOLLEN, Maryland DARRELL E. ISSA, California LINDA T. SANCHEZ, California GINNY BROWN-WAITE, Florida C.A. DUTCH RUPPERSBERGER, Maryland JON C. PORTER, Nevada BRIAN HIGGINS, New York KENNY MARCHANT, Texas ELEANOR HOLMES NORTON, District of LYNN A. WESTMORELAND, Georgia Columbia PATRICK T. McHENRY, North Carolina ------ CHARLES W. DENT, Pennsylvania BERNARD SANDERS, Vermont VIRGINIA FOXX, North Carolina (Independent) ------ ------ Melissa Wojciak, Staff Director David Marin, Deputy Staff Director/Communications Director Rob Borden, Parliamentarian Teresa Austin, Chief Clerk Phil Barnett, Minority Chief of Staff/Chief Counsel Subcommittee on National Security, Emerging Threats, and International Relations CHRISTOPHER SHAYS, Connecticut, Chairman KENNY MARCHANT, Texas DENNIS J. KUCINICH, Ohio DAN BURTON, Indiana TOM LANTOS, California ILEANA ROS-LEHTINEN, Florida BERNARD SANDERS, Vermont JOHN M. McHUGH, New York CAROLYN B. MALONEY, New York STEVEN C. LaTOURETTE, Ohio CHRIS VAN HOLLEN, Maryland TODD RUSSELL PLATTS, Pennsylvania LINDA T. SANCHEZ, California JOHN J. DUNCAN, Jr., Tennessee C.A. DUTCH RUPPERSBERGER, Maryland MICHAEL R. TURNER, Ohio STEPHEN F. LYNCH, Massachusetts JON C. PORTER, Nevada BRIAN HIGGINS, New York CHARLES W. DENT, Pennsylvania Ex Officio TOM DAVIS, Virginia HENRY A. WAXMAN, California Lawrence J. Halloran, Staff Director and Counsel J. Vincent Chase, Chief Investigator Robert A. Briggs, Clerk Andrew Su, Minority Professional Staff Member C O N T E N T S ---------- Page Hearing held on June 7, 2005..................................... 1 Statement of: Estevez, Alan F., Assistant Deputy Under Secretary of Defense (Supply Chain Integration), Department of Defense; Major General Daniel Mongeon, Director for Logistics Operations, Defense Logistics Agency; and Colonel Patrick E. O'Donnell, Commander, Defense Reutilization and Marketing Service, Department of Defense...................................... 65 Estevez, Alan F.......................................... 65 Mongeon, Major General Daniel............................ 82 O'Donnell, Colonel Patrick E............................. 93 Kutz, Gregory D., Managing Director, Forensic Audits and Special Investigations, U.S. Government Accountability Office, accompanied by Gayle L. Fischer, Assistant Director, Forensic Audits and Special Investigations; John J. Ryan, Assistant Director/Special Agent, Forensic Audits and Special Investigations; and Keith Rhodes, Chief Technologist, Applied Research and Methods................. 11 Letters, statements, etc., submitted for the record by: Estevez, Alan F., Assistant Deputy Under Secretary of Defense (Supply Chain Integration), Department of Defense, prepared statement of............................................... 68 Kutz, Gregory D., Managing Director, Forensic Audits and Special Investigations, U.S. Government Accountability Office, prepared statement of.............................. 14 Mongeon, Major General Daniel, Director for Logistics Operations, Defense Logistics Agency, prepared statement of 84 O'Donnell, Colonel Patrick E., Commander, Defense Reutilization and Marketing Service, Department of Defense, prepared statement of...................................... 95 Shays, Hon. Christopher, a Representative in Congress from the State of Connecticut, prepared statement of............ 3 Waxman, Hon. Henry A., a Representative in Congress from the State of California, prepared statement of................. 6 DOD EXCESS PROPERTY SYSTEMS: THROWING AWAY MILLIONS ---------- TUESDAY, JUNE 7, 2005 House of Representatives, Subcommittee on National Security, Emerging Threats, and International Relations, Committee on Government Reform, Washington, DC. The subcommittee met, pursuant to notice, at 2:15 p.m., in room 2154, Rayburn House Office Building, Hon. Christopher Shays (chairman of the subcommittee) presiding. Present: Representatives Shays, Duncan, Dent, and Waxman. Staff present: Lawrence Halloran, staff director and counsel; J. Vincent Chase, chief investigator; Robert A. Briggs, clerk; Sam Raymond, intern; Andrew Su, minority professional staff member; Earley Green, minority chief clerk; and Jean Gosa, minority assistant clerk. Mr. Shays. A quorum being present, the Subcommittee on National Security, Emerging Threats, and International Relations hearing entitled, ``DOD Excess Property Systems: Throwing Away Millions'' is called to order. Following the frugal maxim, ``One man's trash is another man's treasure,'' the Department of Defense [DOD], sells or donates equipment and commodities determined to be in excess of military needs. But now we find the Pentagon is throwing out a great deal of treasure with the trash, disposing of items at steep discounts through one program while other offices within DOD buy the same things new and at full price. Problems in the DOD excess property system are chronic, they're dangerous, and extensive. Three years ago this subcommittee discovered DOD continued to sell top-grade chemical protective suits on the Internet while military units were waiting to acquire exactly the same gear at 10 times the on-line cost. In 2003, we revealed the indiscriminate sale of biological lab equipment by DOD without an assessment of the risks it might be used against us by terrorists. Today, the true scope and costs of systemic weaknesses in the surplus supply chain come into clearer view. At the subcommittee's request, the Government Accountability Office [GAO], extensively audited and tested DOD excess property systems. Their report released this afternoon finds substantial waste and inefficiencies intractably embedded in sloppy, uncoordinated management and inventory control processes. The numbers we will hear are staggering. Each year DOD disposes of property that costs billions to acquire, yet GAO found at least $400 million spent over 2 fiscal years on the purchase of items that need not have been bought at all because they were already paid for and available in that surplus pool. Many of the items here today fit that description, good-as-new or serviceable equipment that DOD sold to GAO for a fraction of the price it was paying to buy the same material. This isn't just a matter of bad bookkeeping, lax management or weak inventory controls, these numbers measure major systemic weaknesses in critical combat support machinery. Waste on this scale affects our ability to meet the immediate needs of men and women in uniform. The $400 million spent on unneeded equipment could have bought body armor, medical supplies, or more than 1,700 fully armored Humvees to protect Coalition forces against deadly improvised explosive devices. Simply put, DOD buys too much and then cannot, with any accuracy, track where the excess property is or who might need it. Once dropped into the multi-billion dollar slurry of the excess property system, good equipment can mix with bad, get left out in the rain, or disappear altogether. Such an unaccountable system easily hides malfeasance and invites theft. Some broken links in this clumsy and costly chain of custody are well known. For more than a decade, GAO has found that DOD asset visibility and inventory management weaknesses pose a huge risk of waste, abuse and fraud. Now we find DOD's bargain basement is leaking badly, hemorrhaging on a scale that no business could or would tolerate. The time is long past for standard approaches and marginal fixes to a fundamentally broken system. As supplier to the warfighter and stewards of immense fiscal resources, DOD must have end-to-end visibility and control over the purchase, transportation, storage, use and final disposition of military inventory. Those who buy too much this year have to know they will pay a price when the equipment appears for sale on the Internet next year for one-tenth the acquisition cost. We are grateful to the GAO team for an in-depth report on a very serious problem, and we look to our DOD witnesses for a discussion of equally serious solutions. At this time, the Chair would recognize the ranking member of the full committee, Mr. Henry Waxman. [The prepared statement of Hon. Christopher Shays follows:] [GRAPHIC] [TIFF OMITTED] T2905.001 [GRAPHIC] [TIFF OMITTED] T2905.002 Mr. Waxman. Thank you very much, Mr. Chairman. I'm glad the subcommittee is holding this hearing today on procurement problems at Defense, and I commend you for your leadership on this issue. I'm going to be blunt in my remarks. This administration is squandering literally billions of dollars on wasteful Federal contracts. Private contractors are reaping a bonanza while taxpayers are being gouged. Whether the explanation is gross incompetence or deliberate malfeasance, the result is the same: Taxpayers are being vastly overcharged. The litany of this administration's mismanagement of Federal contracts is long and costly. The value of no-bid contracts has skyrocketed under the Bush administration. Oversight of Federal contracts has been turned over to private companies with blatant conflicts of interest, and when government auditors do find abuse their recommendations are ignored. Nearly every week the papers are full of stories of contract abuse. The Department of Homeland Security has wasted hundreds of millions of dollars on security contracts that have produced virtually no result. The FBI has spent $170 million on virtual case file software that doesn't work. And in Iraq, Halliburton has overcharged by hundreds of millions of dollars, yet the administration continues to shower the company with Federal funds, bonuses and special treatment. Unfortunately, these are not isolated incidences, they are a pattern of wanton abuse and mismanagement. In today's hearing we will hear about a particularly egregious example of abuse. GAO tells us that the Pentagon has squandered $3\1/2\ billion in valuable new equipment by selling it off at fire-sale prices. But in Iraq, our soldiers are dying because we cannot find the resources to buy the proper armor for our troops and their vehicles. But here in the United States, the Pentagon has sold off billions of dollars worth of medical equipment, power supply units, helicopters, vehicle parts, combat boots, and even military medals at salvage prices. And these examples are the rule, not the exception. According to GAO, the Defense Department gets fair value for surplus Federal property just 12 percent of the time. The rest of the time the Defense Department has destroyed perfectly good equipment or sold it for pennies on the dollar. Congress has a responsibility to do oversight to prevent these abuses. That's why I commend Chairman Shays for holding this hearing. But we also need legislation, and for this reason I will soon be introducing the Clean Contracting Act to stop these indefensible procurement and disposal practices. I want to thank the chairman for requesting the GAO report that is the subject of today's hearing, as well as the ranking member of the subcommittees, and I especially want to thank Greg Kutz and the other members of the GAO, the investigative team, for their excellent work on this important report. Thank you, Mr. Chairman. [The prepared statement of Hon. Henry A. Waxman follows:] [GRAPHIC] [TIFF OMITTED] T2905.003 [GRAPHIC] [TIFF OMITTED] T2905.004 [GRAPHIC] [TIFF OMITTED] T2905.005 [GRAPHIC] [TIFF OMITTED] T2905.006 Mr. Shays. Thank you, Mr. Ranking Member. The Chair would now recognize Mr. Duncan. Mr. Duncan. Well, thank you very much, Mr. Chairman. Once again you're out in front of and on top of a very important subject. I commend you for calling this hearing. I don't know the full details, but I do understand that the report shows that during fiscal years 2002, 2003 the GAO found that the Department of Defense disposed of $2.2 billion worth of materials that were reported to be in A condition, that were either brand new and unused or barely used, and that those things were in new or excellent condition. And I know that we talk about billions up here like it's so much that it becomes meaningless, but that is a lot of money. It is an unbelievable, staggering amount of money. I understand further that on July 30, 2003 the report says the Department of Defense sold 172 pairs of new cold weather boots, valued $23,220, for $69, less than a cost of one pair of shoes; that during those years surveyed the Department of Defense destroyed $73.7 million in circuit cards, $10.2 million in radio sets, $9.1 million in aircraft parts, $3.4 million worth of power supply units, on and on and on; that the Department purchased at least $400 million of identical items during this time instead of using available excess A condition items. The Pentagon, the Department of Defense, seems to have the idea that this Congress will give them anything it wants no matter how terrible the job is that they do, how wasteful the job is that they do, and maybe that's the case but it shouldn't be. The report says the Defense Reutilization and Marketing Services offices that has the responsibility for handling the express property have experienced losses of $466 million from 2002 to 2004, and that one DRMO holding excess property had an error rate of 47 percent. Let me tell you this: Anybody who is not horrified by this does not deserve to call themselves a conservative; anybody that is not horrified by this does not deserve to be called a friend of the taxpayer; anybody who is even remotely connected to this should be ashamed. Any large business with this kind of record, their stock would drop dramatically, heads would roll, people would be gotten rid of. I know that the cause of this civil service system that gives way too much protection to people who screw up horribly, that nothing will be done or very little will be done, but hopefully somebody will act on this and do something about this because this type of record should not--this type of activity should not continue to go on. Thank you very much, Mr. Chairman. Mr. Shays. I thank the gentleman very much. And just to announce that it's our intention, as we said before, to hold a hearing on June 21st on the U.S. Stewardship of the Development Fund for Iraq [DFI], the successor fund to the U.N. Oil for Food Program, which is basically Iraqi money under our stewardship. And we know we need to be looking at that and will be. At this time, the Chair would just welcome our first panel. We have one speaker, Mr. Gregory Kutz, Managing Director of Forensic Audits and Special Investigations, U.S. Government Accountability Office, accompanied by Ms. Gayle Fischer, Assistant Director; Mr. John J. Ryan, Assistant Director/ Special Agent; and Mr. Keith Rhodes, Chief Technologist. We welcome all of you. Is there anyone else that might be responding to questions, Mr. Kutz? Mr. Kutz. One other. Mr. Shays. So we will ask that individual to stand as well as I administer the oath. [Witnesses sworn.] Mr. Shays. Note for the record our primary witness and those accompanying him have responded in the affirmative. And let me just take care of one--I ask unanimous consent that all members of the subcommittee be permitted to place an opening statement in the record, and that the record remain open for 3 days for that purpose. Without objection, so ordered. I ask further that all witnesses be permitted to include their written statement in the record. Without objection, so ordered. And if I can, before you start, congratulations on a document that helps us do our job better and will help the DOD do its job better. We thank you for being here. Mr. Kutz, we're going to have a 5-minute period, and then we'll roll it over for another 5 minutes, but within 10 minutes I'm sure you can cover what you need to. And then we will start with questions. STATEMENT OF GREGORY D. KUTZ, MANAGING DIRECTOR, FORENSIC AUDITS AND SPECIAL INVESTIGATIONS, U.S. GOVERNMENT ACCOUNTABILITY OFFICE, ACCOMPANIED BY GAYLE L. FISCHER, ASSISTANT DIRECTOR, FORENSIC AUDITS AND SPECIAL INVESTIGATIONS; JOHN J. RYAN, ASSISTANT DIRECTOR/SPECIAL AGENT, FORENSIC AUDITS AND SPECIAL INVESTIGATIONS; AND KEITH RHODES, CHIEF TECHNOLOGIST, APPLIED RESEARCH AND METHODS Mr. Kutz. Mr. Chairman, Ranking Member Waxman and Congressman Duncan, thank you for the opportunity to discuss the sale of DOD excess property. Previously we testified that DOD was selling excess property that could be used to produce and disseminate anthrax. We also testified that DOD was selling new chem-biosuits on the Internet for $3, while at the same time buying them for $200. Based on these findings, you asked us to conduct a broader study of the economy and efficiency of this system. Our bottom line today is that ineffective management oversight and controls have resulted in hundreds of millions of dollars of waste and inefficiency in the DOD excess property system. My testimony has two parts: First, the magnitude of waste and inefficiency, and, second, the root causes of these problems. First, DOD reported that $29 billion of the $33 billion in excess commodity disposals for 2002 through 2004 were unusable items, or junk. By junk, I mean items that are in need of significant repair, obsolete, or that need to be destroyed. However, the remaining $4 billion related to items that were in new, unused and excellent condition, referred to by DOD as A condition. Of the $4 billion, we determined that $3\1/2\ billion was waste because A condition items were given away, sold on the Internet for pennies on the dollar, or destroyed. Part of the $3\1/2\ billion of waste is caused by a chronic DOD problem, buying more inventory than it needs. When this happens inventory items are warehoused until they are obsolete and ultimately declared excess. By the time these items get to the excess property system they are no longer in demand, and thus are basically worthless. However, we also identified, as you mentioned, at least $400 million of new, unused inventory that was sold or given away at the same time DOD was buying the same items. By definition, new unused inventory that DOD is still buying is not excess to its needs. This is where the excess property system failed, which resulted in one part of DOD selling, giving away or destroying the very same items that were needed to support our military forces. To illustrate this waste, GAO ordered several new items at little or new cost. Also, using our undercover credit card, we purchased other DOD items on the Internet from govliquidation.com. We have these items here today as the exhibits you see labeled and also on the table, and we will show some of those on the monitors as I walk through this. The items that GAO ordered included a new medical instrument chest, which is on my left, two circuit cards, which are on my right, and two power supply units, also on my right. The power supply units are currently used in the electronic warfare system of the Seawolf fast attack nuclear submarine. The circuit cards are used in secure satellite communications gear by the Navy. We also purchased on the Internet new extreme cold weather boots, tents, gasoline burner units, portable suction apparatus, bandages and medical supplies, badges and insignias, Cooper tires, and Class A military uniforms. Let me spend a few minutes discussing the boots and the tents so I can bring these case studies to life for you. The boots were advertised on govliquidation.com as being 30 pair that were condemned. However, when we received our order, we found that our purchase included 42 pairs of boots of which 37 were in new, unused condition like the ones you see on my right. We paid about $12 per pair for these boots, while DOD paid $135 per pair. Shortly after our purchase we found that DOD had placed an order to purchase over 30,000 pair of the very same boots. In another case we found 172 pairs of boots were sold to the Robinson Trading Co. for 40 cents a pair. We also purchased 27 tents on the Internet for $548 that DOD paid over $2,100 for. Although the tents were also advertised as being condemned, when we received our order we found that our purchase included 21 new, unused tents like the one at my left. At the same time we made our purchase, an order had been placed for 35,000 of these same tents at a cost of $2\1/2\ million. In total, we paid about $3,000 for the items that we obtained, DOD paid over $80,000 for these same items. All of the items displayed here today were still being purchased and were in demand by the military services. Second, the causes of waste and inefficiency included unreliable data, inadequate management oversight and physical control, and outdated systems. We found significant data reliability problems, including errors in quantity, description and condition of excess property items. Military units have lost confidence in the reliability of excess property data and thus purchase new items instead of using items that are in the excess property system. With respect to automated systems, we found the lack of integration of purchasing systems and the excess property systems was a major issue. In effect, these systems do not share data that prevents the purchase of new items that DOD already has available in the excess property system. Our related report included 13 recommendations to DOD related to people, processes and automated systems. DOD is taking actions to address all of our recommendations. In conclusion, with the serious fiscal challenges facing our Nation and with our forces fighting the global war on terrorism, the government can't afford to be giving away inventory that it's buying at the same time. No doubt many of the businesses that profit from this hidden subsidy would like to see DOD continue selling new, unused items for pennies on the dollar. We believe improvements in management of the excess property system could save taxpayers hundreds of millions of dollars annually. Mr. Chairman, this ends my statement. Mr. Rhodes, Special Agent Ryan, Ms. Fischer and I would be happy to answer your questions. [Note.--The GAO report entitled, ``DOD Excess Property, Management Control Breakdowns Result in Substantial Waste and Inefficiency,'' may be found in subcommittee files.] [The prepared statement of Mr. Kutz follows:] [GRAPHIC] [TIFF OMITTED] T2905.007 [GRAPHIC] [TIFF OMITTED] T2905.008 [GRAPHIC] [TIFF OMITTED] T2905.009 [GRAPHIC] [TIFF OMITTED] T2905.010 [GRAPHIC] [TIFF OMITTED] T2905.011 [GRAPHIC] [TIFF OMITTED] T2905.012 [GRAPHIC] [TIFF OMITTED] T2905.013 [GRAPHIC] [TIFF OMITTED] T2905.014 [GRAPHIC] [TIFF OMITTED] T2905.015 [GRAPHIC] [TIFF OMITTED] T2905.016 [GRAPHIC] [TIFF OMITTED] T2905.017 [GRAPHIC] [TIFF OMITTED] T2905.018 [GRAPHIC] [TIFF OMITTED] T2905.019 [GRAPHIC] [TIFF OMITTED] T2905.020 [GRAPHIC] [TIFF OMITTED] T2905.021 [GRAPHIC] [TIFF OMITTED] T2905.022 [GRAPHIC] [TIFF OMITTED] T2905.023 [GRAPHIC] [TIFF OMITTED] T2905.024 [GRAPHIC] [TIFF OMITTED] T2905.025 [GRAPHIC] [TIFF OMITTED] T2905.026 [GRAPHIC] [TIFF OMITTED] T2905.027 [GRAPHIC] [TIFF OMITTED] T2905.028 [GRAPHIC] [TIFF OMITTED] T2905.029 [GRAPHIC] [TIFF OMITTED] T2905.030 [GRAPHIC] [TIFF OMITTED] T2905.031 [GRAPHIC] [TIFF OMITTED] T2905.032 [GRAPHIC] [TIFF OMITTED] T2905.033 [GRAPHIC] [TIFF OMITTED] T2905.034 [GRAPHIC] [TIFF OMITTED] T2905.035 [GRAPHIC] [TIFF OMITTED] T2905.036 [GRAPHIC] [TIFF OMITTED] T2905.037 [GRAPHIC] [TIFF OMITTED] T2905.038 [GRAPHIC] [TIFF OMITTED] T2905.039 Mr. Shays. Thank you, Mr. Kutz. First off, how long was this investigation? Mr. Kutz. A little over a year. Mr. Shays. And tell me, were you surprised by anything you found, or was your opinion such that you just weren't surprised? Mr. Kutz. Well, we had suspicions. In my opening statement I had mentioned the chem-biosuits from your hearing several years ago where they were selling them for $3 at the same time they were buying brand new JS List suits, which are the ones that the soldiers are using in Iraq, for example. So we had suspicions that this could be a broader problem, and after discussing this issue with your staff we decided it would be a good idea to take a broader look at the entire system to see how significant the waste and efficiency could be. Mr. Shays. Well, I'll use the answer to my question by saying I wasn't surprised because of that, and is that your response? Mr. Kutz. That would be my response, yes. Mr. Shays. All of the equipment that we see here, it's your testimony it is still being used by DOD? Mr. Kutz. I don't know if it still is. At the time that we ordered it or requisitioned it, it was still in demand by the services, that is correct. Mr. Shays. Of these, which ones do you find the hardest to comprehend--well, I use the word--which ones here do you find are the most alarming; in other words, alarming you can use in terms of threatening national security, or just alarming because of the magnitude of the issue? I have my own personal choice, I'm just curious what yours is. Mr. Kutz. I think we probably have the same one. The power supply units for nuclear attack submarines, we're not sure why DOD would be letting GAO have them. We don't have any nuclear submarines at GAO, so there would be no reason for us to get those. The same thing with the circuit cards that are for cryptologic satellite communications. We have no need for that, yet we were able to get that. Now, whether there is any security issues---- Mr. Shays. When you say ``we,'' in other words, why would anyone buy it? Mr. Kutz. Well, we didn't buy those. We requisitioned those as GAO. The medical chests, the power supply unit and the circuit cards, we requisitioned those. They knew we were GAO for those. The rest of them we used our undercover card to buy on the Internet from the contractor, govliquidation. Mr. Shays. Now why did you do the requisition? Did you try first to see if you could buy them? Mr. Kutz. No. We wanted to check both parts of the system. The way the system works is, first of all, DOD units and some other entities get a first shot at these items, and then they go to GSA, and governmentwide other agencies get a chance, State and local governments, local law enforcement, and once they go through that they go to governmentliquidation.com and can be sold on the Internet. And so we wanted to check out various stages of the process to see what we could requisition versus what we could buy at the end. Mr. Shays. I'll add another one, the uniforms and the insignias that you could buy; is that the extent of the insignias that you could buy or do you think you could buy others as well? Mr. Kutz. We bought others; I mean, we didn't have enough room to put them on the board. We had 8,000 of them. Mr. Shays. You can get 8,000? Mr. Kutz. Yes. Mr. Shays. Not just duplicates, but other insignias as well? Mr. Kutz. We have some others, yes. Mr. Shays. So it is possible for someone to just basically look like a soldier or sailor, Marine. Mr. Kutz. Yes. Mr. Shays. Just as an aside, I would imagine some of these uniforms are sold to our troops. Do they have to pay full price when they buy them? Ms. Fischer. Chairman Shays, the military has a uniform allowance, so within that allowance they're issued a number of uniforms, shirts, trousers, jackets, camouflaged clothing as well. Mr. Shays. But they're priced at the going rate; I mean, they are given an allowance---- Ms. Fischer. Correct. The units will pay for them, yes. Mr. Ryan. I just want to add, if a soldier goes online he can buy that uniform. So the difference here is the government liquidators is selling large quantities, where you have your e- Bay, which is selling more one or twosies. So in this particular case, in regard to your original question, from a national security perspective, yes, that is a problem in my opinion, the uniform, because it can be purchased, and someone who would like to take advantage of the situation could manipulate the facts, put that uniform on and cause some discomfort for other people I would believe. Mr. Shays. One of the most alarming things when you're visiting in Iraq is the concern that someone could basically wrap themselves in so-called body armor, but it is really a plastic explosive device, it would look identical. And the concern is that they would walk in looking like an Iraqi soldier or an American soldier. And what you're saying is this is easily ordered. Mr. Ryan. You can buy them, that's for sure. Mr. Shays. OK. Walk me through it, and then I will yield to Mr. Waxman--we have as much time, Mr. Waxman, as you want to have, and Mr. Duncan--walk me through the significance of the $400 million. It seems like a lot of money. Mr. Kutz. What we did to get the $400 million is these were exact matches of items that were being purchased that were available in new or unused condition or excellent condition in the excess property system for 2002 and 2003. So we did exact matches of what is called national stock numbers. So to the extent that the data was reliable in the system, which is an issue I mentioned in my opening statement, much of the data is not reliable. We had exact matches of items being bought in the same fiscal year that were available in the excess property system in new condition in the same fiscal year. Mr. Shays. And this is equipment supplies worth $400 million that was excess--viewed as excess, and yet was being continually purchased by DOD? Mr. Kutz. When I say excess, it went outside of the DOD system. It was not reutilized within DOD. It was either sold on the Internet, given away or destroyed. Mr. Shays. So--but at the same time they were buying that very same equipment? Mr. Kutz. Correct, the identical items. It had to be an identical match to be part of the $400 million. Mr. Shays. Just so I know, before I yield to Mr. Waxman-- not yield, give him his time--Mr. Rhodes, tell me each of your roles in this so we understand a little bit of your expertise here. Did you each have different assignments? Mr. Rhodes. My assignment was to review some of the technical equipment to make certain, one, that it had not been used; two, that it was actually what it was described to be; and three, that there was some value to the equipment. For example, let's go to your original point about the power supplies. Just on the facts, item No. 1, it is true, GAO does not have a nuclear attack submarine. Second point is that this is still to this day labeled a critical shortage item by the U.S. Navy relative to the Seawolf attack submarine. Mr. Shays. It's labeled as--say that again. Mr. Rhodes. It's a critical shortage item. Mr. Shays. That was put as excess property. Mr. Rhodes. Yes. And third part is it had never been used, it had never even been screwed into something. So power supply in the possession of the Government Accountability Office and, one, we have no reason to have it and, two, it's a critical shortage item. Relative to the cryptographic gear, they had not been used, they had not even been plugged in because there was no wear on the pins where they're supposed to meet with the satellite calling system. There is no cryptographic keys inside of it, but you can understand the frequency that it runs at and things like that, the kinds of power that they're going to use. The other part is that is an NSA controlled item. The U.S. military is supposed to respond back to the NSA and not destroy it. They're supposed to go back to the National Security Agency about the cryptogear as part of the Uniform Cryptographic Architecture and say this is---- Mr. Shays. So your point is it's one thing to have certain things that are dangerous and being shared, it's another thing to say it's excess and we no longer need it. But what you're saying is there is actually a specific requirement that be returned. Mr. Rhodes. Yes, sir. Mr. Shays. Tell me your focus, Ms. Fischer. Ms. Fischer. Chairman Shays, I was responsible for leading the audit portion of our work. That included the assessment of the data in the purchasing system and the excess inventory system and leading the work to test the inventory accuracy at five DMOs and five DLA supply depots. Mr. Shays. Mr. Ryan. Mr. Ryan. My job here was to help coordinate audit investigations, to identify items that we should purchase, to do investigations on seeing how they were excessed, why they were excessed, who purchased them, what happened to those items afterward. We had three agents, Agent Rodriguez, Agent Newbolt and Agent Brown, traveling around the country doing interviews with the people who were excessing them and the people who were buying them at the same time. We provided support in using our undercover capability to make the purchases through the governmentliquidation.com. And we also worked with Ms. Fischer's team to do some testing on shipments that were short of numbers, quantities, and track them through the system to see if anywhere along the way the DOD would have made some type of adjustments for missing items that were not part of original shipments. Mr. Shays. When I was in the Peace Corps, I was in Molokai, and I was invited to spend Christmas at a friend that I had met. His wife was an unbelievable cook, but at any rate he showed me--and I'm going back 30 years ago, and he showed me his freezer. And if you lifted up his freezer, it all said U.S. Government, and it appeared to me to be products that really were part of our military that were somehow in his possession. He wasn't showing me to boast about U.S. Government, he was just showing me that they had a lot of different food and they ate well. Mr. Waxman. Mr. Waxman. Thank you, Mr. Chairman. I want to thank each of you for the work you have done. This is really breathtaking to imagine that the equipment that I presume still can be used by our own military is being bought for pennies on the dollar, and if they're not being used by the military and they're being bought for pennies on the dollar, we're shortchanging the dollars we should be getting so that we can use it for the needs of our military in Iraq. Let me just verify. Are we talking about equipment that could be used right now by military people, our military people in Iraq? Mr. Kutz. Yes. Mr. Waxman. Give me a quick few examples of that. Mr. Kutz. Oh, I would say probably several of these things; certainly the medical supplies could be, the gas burner units possibly, the suction apparatus, and I guess the insignias and the uniforms possibly. So a number of these things could be. Mr. Waxman. So they could be used by our military in Iraq, and you have also testified that they could be used by our enemies in Iraq if they are purchased by just going on the Web and getting a bunch of uniforms to appear like they're American soldiers. Is that something we need to be worried about, Mr. Ryan? Mr. Ryan. I think that is a concern. I think the DOD should take a serious look at what they're excessing in regards to uniforms and insignias, determine if that uniform is still being used by our soldiers today, why are we getting rid of it. If it is so blatant that the uniform can be recognized by the humans in charge of security that it is not a current uniform, then I think they ought to excess it. But I think a lot of consideration should be given to--DOD should give a lot of consideration to what they're doing with the disposal of these uniforms, yes. Mr. Waxman. There are two agencies at the Department of Defense who are involved; is that correct, Mr. Kutz? Mr. Kutz. There is the Defense Logistics Agency and the Defense Reutilization Marketing Service, which is under DLA's control basically. Mr. Waxman. And what are they supposed to be doing; are they supposed to be getting rid of stuff we can no longer use and selling it for the most money that can make? Mr. Kutz. Well, DLA is in charge of buying the new items and supplying the troops; they do a lot of the logistic support for our military forces. The excess property system has many functions, one of them being to reutilize new and usable items like the ones we see here today. They also do things such as demilitarizing or destroying items that could be used, should not be having technology transferred outside of DOD. So certain things now like the chem-bio suits that we testified on before are now typically destroyed if they are, rather than sold to the public, which is a result of this subcommittee's prior hearings, a positive result of them. Mr. Waxman. Ms. Fischer, let me ask you this question, because I think it fits in with what you said was your focus. How is it that an ordinary retail establishment or grocery store in this computer age can keep track of their inventory, but it doesn't appear that our Defense Department can do the same? Ms. Fischer. That's a good question, Congressman Waxman, and you're absolutely right. But DOD has systems that are not integrated, it doesn't know where its various pieces of property are at any given time, and the systems don't give adequate visibility over those items for reutilization. Mr. Kutz. And Congressman, I'm going to be testifying tomorrow on that very topic before Chairman Platts and Representative Towns. DOD had reported over 400 duplicative stovepipe business systems, and of those, 2000 of them, they report are logistic systems. So you can imagine 2000 systems out there that do logistics. It's a very, very difficult situation for the Department to be effective with supply chain management with that kind of technology environment. Mr. Waxman. Have you given thoughts for recommendation of what we ought to do in Congress? Mr. Kutz. With respect to systems modernization? Mr. Waxman. Yes. These agencies are part of the Defense Department, we fund the Defense Department, we expect them to be using this property in a reasonable way, they use some common sense, if nothing else, but at least they have their systems in place. What do we need to do, scrap the system and recreate it, or is it fixable? Mr. Kutz. I think you need to do what you're doing today. You need to have hearings like this, and when issues like this are out there you need to have oversight hearings, you need to stick with these issues and hold DOD accountable. It's really a management issue. It's not really--I don't think there is any legislation that's not in place right now that will prevent them from being successful here. It's really a matter of leadership and management. Mr. Waxman. So if Congress does its oversight job, it keeps them honest? Mr. Kutz. I think that's the right thing for you to be doing. Mr. Waxman. And if we didn't do our oversight job, isn't there somebody in the administration that's supposed to be watching what goes on in the Defense Department? Mr. Kutz. Well, certainly the management within the Department of Defense is responsible, and I guess OMB also has some oversight over some of the systems issues governmentwide, whether they're e-gov initiatives and other types of oversight efforts. So there are other people responsible. Mr. Waxman. How easy are we talking about the purchase of these items? You've mentioned a Web site, it sounds like a government e-Bay service where you can go on there and pick and choose medals, uniforms. Can you get rocket launchers, Mr. Rhodes? What is the most serious thing---- Mr. Rhodes. We were not able to procure rocket launchers. Mr. Waxman. What is the most serious thing that you were able to procure that could really endanger our security? Mr. Rhodes. From my technical perspective, it's difficult to say. I mean, I look at a tent and I see a soldier that's getting wet. I look at that medical equipment and I see a soldier that's bleeding. I look at that gasoline burner and I see a soldier that's cold. I look at those boots, and that's a soldier who's barefoot. I look at that suction apparatus, and there's a soldier with a chest wound from an improvised explosive device on the road into downtown Baghdad. So, I mean, all of these have their own weight and they have their own measure. I can't pick any one of them and say it's the most catastrophic. Mr. Waxman. Well, let me ask Mr. Ryan, because I heard something about an investigation of missing warheads. Do you know anything about that? Or circuit cards, what would those be used for? Do you have something--some information on---- Mr. Ryan. Well, I defer to Mr. Rhodes in regards to identifying the specific purposes of the items. We were given the leads and we followed the investigation that we were told to do. So I will defer to him in relationship to the degree of importance or---- Mr. Rhodes. The relative importance of a warhead. The argument is made that they were inert; however, the warheads were sitting on the back of a flatbed truck and were not protected nor covered. If warheads are missing, even if they're inert and you cut them open, then you can find out how they work. Inert just means they don't have explosive in them; it doesn't mean that you don't understand the shape of the charge, it doesn't mean you don't understand how they fragment, it doesn't mean you don't know how they fuse and arm. Mr. Waxman. Could somebody get a missile warhead that is inert through any of these systems of procurement? Mr. Ryan. I think in that particular case, if it's not coded correctly when it's going into the disposal system, much like these items were, then someone could requisition it. It all depends on the coding, the de-MIL coding of the power supply or the circuit card. These are examples which we were not supposed to get, but we did. Mr. Waxman. I see. So you found a lot of miscoded information on those things? Mr. Kutz. Well, let's use the example of the tent. The tent was coded as condemned. These boots were coded as condemned, and they're new and unused. I think what we're talking about too, before, was items that were lost, or losses if you will, and there were some things that were lost that when we did our statistical sample we tried to find aircraft parts, helicopter parts and chem-bio suits and they were gone. And body armor also was reported as missing. And so we did report $466 million of items that DOD themselves reported losses. But we became concerned about that because when we did our random statistical samples, when we looked for some of these items they were just gone and there was no explanation of where they had been. And Special Agent Ryan is doing some followup investigations on that, but we're not sure we're going to be able to come to resolution as to what happened. Mr. Waxman. Mr. Kutz, you suggested that we have congressional oversight. Do you think Congress needs to revisit the procurement laws themselves to spell out what can and cannot be contracted, either contracts, government contracts, obviously for services and we hear a lot about that, but these are government contracts for sale of items, do you think that ought to be covered by changes in procurement law? Mr. Kutz. I'm not a procurement expert. I would defer that question. Mr. Waxman. Well, it was really amazing that we're seeing from you these kinds of examples that are really horrifying when we know that our troops are not fully equipped and we're told we don't have the money for it. We know we have these huge budget deficits in this country, and yet we're finding our own Defense Department so wasteful in the management, maybe not intentionally, but wasteful nevertheless, of the costs and equipment and the use of items that we've purchased to make our country stronger. And their inefficiency I think is making our country weaker and our country also poorer as a result. Thank you very much. Mr. Shays. I thank the gentleman. Before going to Mr. Duncan, I just want to have you clarify a little bit. There is so much that we could be talking about we could keep you here a long time. And I'm going to make an assumption that some of what you are doing is triggering additional investigations; is that correct, Mr.---- Mr. Kutz. That's correct. We are looking at some of the lost and potentially stolen items. Mr. Shays. And so just explain to me--and you said in excess property loss, in other words, it's literally property that should have been there that isn't? Mr. Kutz. Correct. Mr. Shays. And when you talk about the property loss of $466 million, that is what you discovered or what DOD acknowledges? Mr. Kutz. No. That's what they reported. When we became concerned about it was when we were doing random statistical samples at 10 of the locations, and some of the lots we went to observe basically were gone, complete lots were gone. Mr. Shays. Was that an infrequent occurrence? Was most of the time it there? Mr. Kutz. Most of the time things were there, but certainly it was enough for us to be concerned. I mentioned aircraft parts, chem-biosuits, helicopter parts, some of the things were not just concerns because of the frequency but for the types of things that were missing. Mr. Shays. But they acknowledged $466 million unaccounted for. Mr. Kutz. Correct. And again, whether they're recordkeeping issues or stolen or lost, nobody knows for sure. Mr. Shays. And we don't even know how accurate that number is? Mr. Kutz. Correct. That could be understated, overstated. Ms. Fischer. Because in the sample we had at the Columbus DRMO there were 23 examples of either entire turn-ins that were missing or quantities of other turn-ins that were missing, and they only recorded losses for two of those. They never recorded the losses we identified in our test work. Mr. Shays. So what you're telling us is, when you asked DOD their losses, they said $466 million, which is a very high number, I mean it really is. I mean, it's not $466,000, it's not $4.6 million, it's not $46 million, it's $466 million. You're saying that you encountered--a majority of those losses that they couldn't account for were not being stated as losses? Ms. Fischer. Correct. And that includes those 72 chem suits at the Columbus DRMO that weren't there when we did our testing. Mr. Shays. So when you identified losses just randomly, most of the time they weren't included as losses by DOD? Ms. Fischer. At the Columbus DRMO that is correct. We don't know across DOD because we didn't test every warehouse. Mr. Shays. I understand. Thank you. Mr. Duncan, you have the floor for 10 minutes. Mr. Duncan. Thank you, Mr. Chairman. I will be very brief. I've got some constituents waiting on me. But Mr. Kutz, how long have you been with the GAO? Mr. Kutz. A little over 13 years. Mr. Duncan. Have you seen any worse examples of waste in the time that you have been there? Mr. Kutz. I've seen a lot of examples of waste, that's kind of what we do. I'm in charge of our team that does forensic audits and special investigations. And so we look at fraud, waste and abuse across the government and there is lots of it, and DOD has its share. Mr. Duncan. Well, let me ask you this, a witness on the second panel will try to defend this by saying that their primary focus should not be on how much we made on the resale of these items, the important point is getting the right items to the warfighters when they need them while simultaneously providing optimal return on the investment of the American people. Do you regard what you found as providing optimal return on the investment of the American people? Mr. Kutz. No. The $400 million I mentioned would be a waste of taxpayer money directly related to the excess property system. The other part of the $3\1/2\ billion of waste that we talked about is not the fault of the excess property system; it is back to the logistics overbuys that are a chronic DOD problem, where they just buy more than they need. And by the time it makes it to the excess property system, you could have a 5 or 10-year-old computer that's really not worth much by that time. It's still brand new in the box, but after 5 years that computer is not worth a whole lot of money. Mr. Duncan. Well, I think most people, if they heard you were buying boots for less than $12 a pair on an advertisement in which you thought you ordered 30 boots and you ended up with 42, 37 of which were brand new, never used before, and you bought them for less than $12 at the same time the Pentagon was ordering what, 21,000 new pairs at $135 a pair? Mr. Kutz. Correct. Mr. Duncan. Something like that. I mean, if I told that to people in my district they would think it's terrible. Mr. Kutz. I wish I could tell you that I was shocked but I'm just not because I have seen this kind of thing across the government. Mr. Duncan. Well, I can tell you this, most of these examples that you've given here today would shock most of the people in my district, I can tell you that. They may not be a shock to you because you have seen so much of it over the years. I mean, when you're talking about buying these half tents, you know, and these--all these other things that just-- sometimes pennies on the dollar. In fact the boots, I saw someplace where the boots were later sold to a trade company for 40 cents on the dollar. Mr. Kutz. Right. 172 pair of these extreme cold weather boots were sold to the Robinson Trading Co. They sold them to a place called Mad Dog Wholesalers in California for $5 a pair. Mad Dog sold them to other entities, excess property entities for $30 a pair, and the trail ended there, we didn't follow it any further, but in all likelihood they retailed them for something greater than $50. And that's an example where everybody made out but the American taxpayer. Mr. Duncan. Well, all I can say is, I mean, when I read all this about these chemical--this was from the earlier hearing, the chemical suits that you bought for $5 were, these items had an original DOD acquisition cost of $55,817 and GAO paid only $5 shipping cost to obtain all of them; I mean, this is just ridiculous. And in fact, I think that anybody who didn't work for the Federal Government would be embarrassed and ashamed to come up here and try to defend something like this like the witnesses on the next panel are apparently going to try to do. Thank you, Mr. Chairman. Mr. Shays. I thank the gentleman. Mr. Dent, do you have any questions? Mr. Dent. No questions. Mr. Shays. What I would like to do is have our counsel ask a few questions before we get on to our next panel, and I may have a few more. Mr. Halloran. Thank you. In the course of this work did you discern followup or implementation from your previous work in this realm? Did you see a risk assessment process for biological lab equipment? Mr. Rhodes. There is a risk process that is labeled interim. It is not, we aren't seeing anything finished in it. There was an interim process for it. It does not include coordination, as our recommendation made, with the scientific community inside or outside of DOD. Therefore, we have some pretty strong reservations and some strong concerns about the veracity of the risk assessment. For example, some of the equipment that we were able to get was just being held. That's the entire risk plan was just to hold on to it, once it comes in to park it and leave it. Mr. Halloran. To what extent would the success of even that interim proposal rely on data feeding it? Mr. Rhodes. Well, it wouldn't in this place because, one, it's the interim risk assessment, and the other is it didn't actually take in the veracity of the scientific community that we recommended, both inside and outside of DOD. Mr. Halloran. Mr. Rhodes, would you characterize the DOD response to the report? The DOD has seen this and had time to react to it; could you characterize their response? Mr. Kutz. I would say it's responsive, and that they're taking action on all 13 of the recommendations in this report. Mr. Halloran. I'm going to ask you to do a little better than that. They're taking actions such as they've said they did before. Are they actions that are likely to yield results in the near term? Mr. Kutz. Well, I think there's two things. In the short term they can't deal with the systems issue. In the short term they're going to have to improve human capital and processes. In other words, when the excess property items come into the system people are going to have to do a better job of validating the data. Right now that was one of the problems we saw at some of the systems at excess property locations, is that they were not validating data when it came into the system. So they can improve the human capital and the processes, but the systems is one that is a long-term situation, and history shows that they have not been real successful implementing new systems that provide integrative solutions. Mr. Halloran. So you're saying that based on the quality of the data you saw, the most critical near term thing they could do is improve the training of the intake of those creating the data at the start? Mr. Kutz. Yes. Validation of data and improvement of the quality of the data in the system is the most immediate thing they can improve. Mr. Halloran. And that's pretty doable; it doesn't require a multi billion dollar computer system---- Mr. Kutz. Correct. I mean, it doesn't give you the integration of the excess property system in the purchasing system, but it at least gives you good data so you can do exact matches and determine what's available before you buy it. Mr. Halloran. Well, speaking of integration, who wants to tell the story of the biological safety cabinets? Because you saved the money on this, didn't you? Mr. Kutz. Mr. Rhodes can discuss that. Mr. Rhodes. There were a set of--it was a full set of six biolevel 3 safety cabinets. At an earlier hearing we came up and talked to you about--these are safety cabinets that are one level below biolevel 4. Biolevel 3, you can work with some extremely dangerous pathogens. We found out that this equipment was available. And I have a friend, a scientific friend, who is the head of the Biolife Sciences Center out at Dugway Proving Ground, and I asked him if he would like six biolevel 3 safety cabinets for just basically for free, DOD had to pay the shipment to, and he said of course I would because in the process--he was actually in the process of trying to set up the procurement of three biolevel 3 safety cabinets, and now he was going to get six for nothing, somebody else had to pay the shipping. And this is an example of equipment that was just being held. It had come in, had been excessed, but the DLA---- Mr. Halloran. It had been miscoded, so it wasn't even visible to him, had he not looked in there---- Mr. Rhodes. It wasn't on the Web page, it was sitting in a Norfolk site. And so we parlayed, we did the deal, as it were, we put the folks at DLA in touch with the folks at Norfolk. The deal was closed, and it ended up not just being three biolevel 3 safety cabinets, but they got a whole series of absolutely pristine scientific equipment, including some extraordinarily expensive microscopes, as well as tools and cabinets and controls and all that. So I guess we returned some money to the taxpayer by making certain the deal got closed or something. But it was a matter of we knew someone, and there was no system in place for DLA to know the same person. Mr. Halloran. Your report discusses, it seems to me, significant extent of kind of downcoding of surplus material when it's turned in, and you found it, it was marked condemned and it's good as new. And your report refers to a broader phenomenon of downcoding material. Why is that? Is it error, or is there some incentive to do it? Mr. Ryan mentioned this aftermarket that likes the stuff that way. Is there some incentive to mark it as condemned and keeping it moving? Ms. Fischer. There is actually confusion I think on the part of the military units about what the definition of unserviceable is. In the interviews we did with the people that are turning in the excess equipment, they view unserviceable as meaning an item is unserviceable or unusable to them, they don't have a need for it. So it is unserviceable even if it's new and unused, so they use one of the condemned codes or codes that says it needs repair or something in the unserviceable category. We did talk to DOD about this even a week ago, and they recognized that there is training needed to resolve this problem, and they have started a training program. Mr. Halloran. That's training a lot of people. Who in the unit can excess something, to declare something excess? Ms. Fischer. Well, the people that are using the equipment first off. When they turn it in, they know what condition it's in. They know whether they have used it or not or if it needs repair. And we saw things at the DRMO that had signs on it or tags on it that said needs repair or broken. They can certainly identify the equipment that way. And then the supply and logistics units that actually process the turn-ins can observe it, look at it, test it, or ask the turn-in unit the condition of the property. And they're in the best position to record the condition before they turn it into the DRMO. And then DRMO personnel should inspect it and verify that the information they're getting is correct before they enter it in inventory. And then you would have a good process. You can rely on the condition, the item description, the quantity that's advertised as available. You wouldn't order something and come up short later or come up with the wrong item later. Mr. Ryan. I might add, also, that there is some success in coding also. I will give you an example. Up at NSA they disposed of several hundred computers because they changed systems. These computers were brand new, in a box, hadn't been used, but they were there for a year or two because of the systems change. The individual there responsible for property decided they were no longer serviceable, so they sent them to DRMO. Well, when DRMO saw them, they saw they were brand new in a box, and quite honestly those computers were a lot better than what other Federal agencies had or were using right now, so they upcode. They change the code to make it a very good product. Well, because we have special programs in this process, they're constantly hawking the Web site to see what items are coming up for new. Mr. Shays. Who is ``they?'' Mr. Ryan. I'll give you an example---- Mr. Shays. I don't understand who ``they'' is. Mr. Ryan. It's the Law Enforcement Sharing Organization [LESO]. They basically saw these computers, and they went ahead and requisitioned them, all of them, as soon as they became available. And they came and got them. And what we did is we followed up on those computers and we found out that they were warehousing these computers and did not distribute them. So they took them out of the hands of people that could actually use them. They were warehousing them for the future. So what it is---- Mr. Shays. Let me understand. They are warehousing technology that can be dated every moment for the future? Mr. Ryan. Well, what the law enforcement did is they took them for the whole State of Kentucky. And in this particular case, they put them there until people needed them. And then they distributed them as they needed them. So it was a success in regards to realization if the special programs are to get the DOD property. Mr. Halloran. Finally, the testimony on the next panel is going to suggest that the waste in the system is somewhat marginal or within an almost inevitable boundary because of the size and scope of the DOD acquisition and operation. Do you concur with that? Mr. Kutz. If you talk about the lost and stolen, we wouldn't concur otherwise. There is simply shrinkage in a retail entity, but isn't a retail entity. This is a warehousing entity. And I believe if they had integrated systems, that they could eliminate several hundred million dollars of this waste. With respect to the lost property, if that is what they're talking about, we probably wouldn't agree with that. We are not talking about Charmin and toothpaste here. You're talking about things like body armor and chem-bio suits that are missing. So that is not a relevant apples and apples comparison. Mr. Ryan. I might add, too, that I'm not sure that the numbers--the numbers are understated. I think that there is more missing than what is reported because just in--we had a hard time initiating investigations. Because we didn't know what number to start with, when we tried to validate what the generator was putting in a box, we couldn't do it. The numbers didn't follow through. Using the example with Ms. Fischer that we used in Ohio, there were numerous shipments that were missing items. The generator put down 100, but when we counted the box when it was received, there might have only been 80. But they passed it through. They don't count numbers. It is a pass- through system. So they don't spend time counting. So you can't tell really how much is missing, how much has been stolen. It is just, it is very hard to do from an investigator's point of view because you have no starting point. You need a starting point, and we didn't have one. Mr. Kutz. And back to the $400 million, too, again, if you consider the fact that the boots and tents were in the system as condemned, we didn't count those in the $400 million because those showed up as items that were unserviceable. We only counted items toward that were exact matches that were shown in the system to be new and unused or in excellent condition. So that number is probably larger. Mr. Rhodes. I just wanted to make one point about the difficulty in the numbers in those systems. Mr. Kutz and I have testified on several occasions about problems in the systems. If we go to our example of the dummy warheads, that is a hard example where we couldn't figure out what the number is. So we don't know if any were missing or not. Because the driver had one number; the deliverer had another number; the people who originated it had another number. The point I would make is that, yes, if somebody wants to say there is something on the margins, fine, they can go ahead and say that. But when you're talking about inert warheads, I don't know that anybody in the private sector sells inert warheads. Likewise with the power supply. I don't know that there is--we aren't talking about the margins there. We're talking about a critical shortage item. Also, I would make the point that, the fact that we were able to get that power supply is listed as a successful reutilization. So the fact that the Government Accountability Office, that has no Sea Wolf nuclear attack submarine, got the power supply for the electronic warfare system for that very same submarine as a critical shortage item is now listed as a successful reutilization. Mr. Shays. As I listen to this, I think that we don't have to make it sound worse than it is. Because it is really bad. And I'm also thinking that I can't imagine anyone in DOD wanting it to work this way. So I'm now trying to struggle with why it's happening. And I'm trying to think of what I would do if you asked me to be put in charge of this program. I mean, is it almost without certain resources and support, is it almost in your judgment--Mr. Kutz, if you were asked to be put in this program, how long do you think it would take for you to straighten it out. And I don't mean it in an arrogant way. In other words, if you used the best of your skills and so on, if you were coming, we said OK, you are going to be in charge of this program, and I say, OK, you're in charge, and you have this amount of time to do it, and, then heads roll if you don't, what amount of time should I give you to straighten out this problem? Mr. Kutz. Well certainly accountability is an issue, and I think there is a lot of turnover in the leadership of some of these areas like the DRMOs, so turnover would be an issue. I don't know if I'm the right person. I don't know if I could ever fix it any better than anybody else. DOD has some of the best people in world. And I'm no better or worse necessarily than any of those people. So I think it is a difficult system. Mr. Shays. Let me ask you in this way, we have extraordinarily capable people in DOD, but we do have Government limits in what they can be paid. Mr. Kutz. That is true. Mr. Shays. My understanding is that the $18 billion figure that is over a 2-year period is excess goods, excess material, correct? Mr. Kutz. Correct. That is the original acquisition cost for items. So they could be 5, 10-year-old items, but that is what they originally cost. Mr. Shays. So they originally cost $18 billion, and so some of them might have been used? Mr. Kutz. Absolutely. Most of the items are, as I mentioned in my opening statement, used items, in need of repair or kind of junk basically. The $4 billion we're talking about is some of the nuggets going through the system of brand new items or new unused items. So this is the minority of the stuff. Mr. Shays. Let's focus on this, on the $4 billion. And I hear, you know, some of my colleagues who rail against contracting, and Lord knows we need to do good supervision of contracting. But if you could get a contractor and you paid them $10 million, but he solved the problem with an organization of people, it would be money well spent. We don't have that capability. So we are limited, it seems to me. Correct me if I'm wrong. Are we able to go outside DOD and contract this all out potentially? Mr. Kutz. Yes, I mean, we do contract things out, if you look at the other hearings we have had with you on business systems modernization, and I'll say DOD right now is spending $13 billion a year on its business systems or $35 million a day for the 4,100 stovepipe duplicative systems they have, that is not a very good return on investment for taxpayers. And I would say a vast majority of that money is probably going to private- sector contractors who are not able to or have not been able to solve DOD's problems. So I think some of the best minds in the world are working on this, and it really has been a very tough thing to resolve. Mr. Shays. So then let me, you had pages and pages of recommendations. List to me what you think are the most important recommendations. Mr. Kutz. Well, I'll give you mine, and I'll let the other folks here chime in, but I would say the issue related to validation of data would be No. 1 where items that are turned in are correctly recorded, because if you don't record them correctly at the very start of the process, often times we see that they go through the entire process in error. So for example, these boots or the tents that were coded as condemned, someone should have caught that along the process. Mr. Shays. When we code them, do we have the name and the number, or do we just have a number? Mr. Katz. It would be the national stock number which is a unique identifier for these items, a description of the items, the quantity, the condition code, all that. Mr. Shays. So someone should be able to look at it and say, you know, these sure as hell aren't boots. Mr. Kutz. Correct. And they're not doing that. That is the policy. The policy is, when items are turned in, they are supposed to be validated for the most part, and we found that was one of the biggest issues that wasn't happening. Mr. Shays. So validation of data is one. What is another one? Mr. Kutz. I'll use one more and let the other folks talk. The long-term integration of the purchasing system and the excess property system where, if someone is going to buy the new boots, the system does not let them buy the new boots because it tells them that we already have boots in the warehouse. To me, the integration of systems like that would be a major improvement of what they have and could really eliminate a lot of the waste I'm talking about. Mr. Shays. I'm not sure I fully grasp what you're saying, so say it over again. Mr. Kutz. Let's say you have an acquisition system that tells me that the military units need 10,000 of these boots. When I go to buy those 10,000 boots, the system doesn't tell me that there is 2,000 boots in the excess property warehouse. So I go buy 10,000, but I already had 2,000. If I had known there were 2,000, I would have only had to have bought 8,000. Mr. Shays. And you would have had the others right away? Mr Kutz. I would have had the others right away. They were already in the DOD warehouse. Mr. Shays. I'll take some other recommendations that you would want? Mr. Ryan. I think the two that I have are very similar to Greg's. I think there has to be some type of accountability. Someone has to be held responsible in the beginning of this process when you're entering the excess property stage. You have to be able to verify numbers and the conditions. My second recommendation is to have a complete modernization of this coding system, make it more user-friendly so that people understand it. Just because NSA can't use that computer, they shouldn't declare it unserviceable. Because when people go into the system and they see an unserviceable computer, they're going to back away from it because they don't want to get stuck with scrap. So I think it is incumbent upon DOD to do a better job of modernizing the coding system and the situations in which they're going to advertise this equipment. They're my two. Ms. Fischer. I agree 100 percent with the concern over data reliability and the first step being to get accurate data in the system because that would impair the reutilization process from the very beginning. In addition, I have a concern about an interim solution. The integrated systems effort is targeted for completion in July 2009 if it doesn't slip from that. So there is another 4 years or so that we could be wasting a couple hundred million dollars a year. And something as simple as coming up with a way to list NSNs that are being purchased as well as NSNs that are flowing into the excess property process and being able to match those up---- Mr. Shays. And NSNs are national stock numbers? Ms. Fischer. National stock numbers. Yes. They identify like items, you know, standard-use items so you know what it is. I am concerned, that they need to come up with a workable interim process for matching that up so that DRMOs, when they get something in a condition, know if that is still being purchased during that fiscal year. And they can let the DLA supply center know they have those items so they don't turn around and purchase the same items. Mr. Rhodes. My No. 1 concern, of course, would be the data reliability because all of these things are supposed to be junk. We bought junk. Well, it is not junk. It is all good. Mr. Shays. I want to clarify. When you say all of them should be junked, no, you have certain excess material that is excess. It is not necessarily junk. Are you saying all of these you bought were told were junk, were labeled as junk. Mr. Rhodes. Right. Yes, this was all garbage. Mr. Shays. Define junk and garbage to me. I'm sorry. Mr. Rhodes. It is considered unserviceable. It is considered---- Mr. Kutz. In the system, it is recorded as unserviceable. Mr. Shays. Every one of these items? Mr. Rhodes. Every one of these items: Those sterilized medical supplies in packages that have never been opened, those circuit cards that were in sealed containers, that power supply that was sealed up, that suction apparatus if we break the seal on the pad, it will no longer be sterile. But right now, it is considered sterile until you break the seal. All this, these unused boots, this unused gas can. Mr. Shays. Well then how would they have--never mind. Mr. Rhodes. The point that I would add in to the data reliability, which is actually a function of the other recommendations had that have been made, goes back to earlier recommendations that we have made about understanding the value of the equipment. And I don't mean dollars and cents. I'm talking about, what does this mean? Who can use this? Part of that is tied into, somebody's already buying it. But I can't, I can't understand how I in the GAO am able to buy a critical shortage item, even if it is labeled as junk. How do I get a critical shortage item, one that I can't use? And the other is, it is a critical shortage item that someone else can use. Mr. Shays. Well, having been a Member of Congress for 18 years and doing oversight for as long as I have, and as I get older, I get a little more impatient. If you were making a recommendation to the panel that followed to be a part of a story of success given what you think are the most important issues, what would be your advice? And then we will go to the next panel. Mr. Kutz leaned to you, Mr. Ryan, because he doesn't know what he was going to say. You're allowed to laugh, Mr. Kutz. That was my best attempt to be funny today. Mr. Ryan. Mr. Ryan. For the next panel that follows, I'm not really sure what you say to them. I think they're in a culture that needs to be changed. I think they're fighting an uphill battle with trying to live in today's modern economic world. They're also in an area where we as society trust people to do the right thing. Some people have a tendency to take advantage of that trust. From my perspective, from the law enforcement perspective, that is what I'm looking at. I'm looking at, how does someone compromise a system to get ahead? And because there are so many people involved in the process and the trust factor from point A to point B to point C must be there, that is something that they have to live with at that level. So I don't know what this panel can do at that beginning level to make this happen except have more accountability maybe for their managers. And that would be the point that I have to them. Mr. Shays. OK, thank you. Mr. Kutz. Mr. Kutz. I would say again hearings like this are very good to hold people accountable. It helps sharpen their focus on what needs to be done to fix problems, and they have to study up to be ready to face questions and be prepared to answer them. And these are tough questions. And they are going to be difficult to answer. But as I've said, DOD has some of the very best people I have dealt with in the Federal Government. And I know they have tried their best, and they do many things well at DOD. And it's always been a very ironic situation or difficult situation to understand how we can have cruise missiles that can strike within a certain distance in Baghdad, and we can't deal with some of these business systems. It is just very hard. We have talked about this before, how hard it is to understand how you can have that dichotomy. Mr. Shays. Fair enough. Ms. Fischer. Ms. Fischer. Of course, I agree with what has been said. I think the issue, as they move forward, because they agree with our recommendations--they recognize their process, improvements needed and systems improvements and human capital issues to deal with. But I think as they move forward, oversight and accountability is key to keep moving in the direction they need to move to solve this problem. Mr. Shays. Thank you. Mr. Rhodes. I would say, build the hard linkage between the acquisition system and the excess property system so that you don't--each one locks the other one out relative to an item. Obviously, that requires the data reliability and the internal controls to be very strong. But until and unless they get to the point where I can't buy a gasoline burner unit because there is one sitting over in the warehouse or I can't buy all these boots, because they're sitting in the warehouse--I mean, if you were Wal-Mart, Wal-Mart doesn't do that. So it is not impossible. RiteAid doesn't do it. All these places don't buy stuff they don't need, because they already have it. So, OK, there is a margin. We all understand that. But there is no lockout system currently. There is no tie between acquisition and excess. Mr. Shays. Thank you. Is there any question that we should have asked that we didn't ask that you want to put on the record? And that is a serious question. Is there something that you thought of and if there is a question that you wanted me to ask, so you don't have to volunteer it, because you want to say you were asked it, just assume I asked it. Mr. Kutz. I want to followup on the last hearing you had on the biological equipment and the chem-bio suits. We did not see anything of those going out the door since your last hearing. So that was a very positive from the hearing you had a little over a year ago. Mr. Shays. Thank you all. You have done a yeoman's work, and I know that you appreciate the cooperation you got from DOD. And I know that they appreciate your giving concrete recommendations besides just exposing what is not working. So thank you for your service. And we will get to our next panel. Let me welcome Alan F. Estevez, Assistant Deputy Under Secretary of Defense, Supply Chain Integration, Department of Defense; Major General Daniel Mongeon. Am I saying that correctly, sir? General Mongeon. Mongeon, sir. Mr. Shays. Pardon me, Mongeon. I'm sorry. And Colonel Patrick E. O'Donnell, Commander, Defense Reutilization and Marketing Service. Thank you very much. If you would raise your right hands. [Witnesses sworn.] Mr. Shays. Let me say from the outset that I know that all of you are very capable, and very dedicated, and we are blessed to have your service to our country. And I think you're in charge of something that is a mammoth undertaking. I will just, before you make your testimony, say, in asking a question of our previous panel, what they would recommend and the challenges, I think there is a culture, I accept in a very strong way that there is a culture in government that requires you to be a good team player. And sometimes, being a good team player, in my judgment, impels people who testify before a committee to understate the task, to not want to blame someone else, to take the hit, be a good soldier. And I think that sometimes impedes our capability to get this done. And so what I request is really a candid conversation about the tasks that you're encountering, the challenges you face, the lack of resources that you may have in some cases, the mistakes that were made, that have been made, whether by you or people before you. Not with the intention of throwing stones, but just to help us know how we can break through this thing, because it is, it is very serious. I would like to know where you think the progress is, but I'll be very up front with you in saying that I don't see the progress. I think this is a record that is just going around saying the same thing. That is the way I feel. And I do appreciate each and every one of you. And I know that you are doing a job I wouldn't want to do because I don't think I could do it. So, why don't we start. General--Mr. Estevez, am I saying your name correctly? Mr. Estevez. Estevez, yes, sir. Mr. Shays. Let me just say, and I will throw stones at someone else. I always ask my staff how to pronounce names. And the last two hearings, they've gotten one name wrong each time. And they've had me practice the wrong way to say it. So I no longer ask them with much faith. STATEMENTS OF ALAN F. ESTEVEZ, ASSISTANT DEPUTY UNDER SECRETARY OF DEFENSE (SUPPLY CHAIN INTEGRATION), DEPARTMENT OF DEFENSE; MAJOR GENERAL DANIEL MONGEON, DIRECTOR FOR LOGISTICS OPERATIONS, DEFENSE LOGISTICS AGENCY; AND COLONEL PATRICK E. O'DONNELL, COMMANDER, DEFENSE REUTILIZATION AND MARKETING SERVICE, DEPARTMENT OF DEFENSE STATEMENT OF ALAN F. ESTEVEZ Mr. Estevez. Thank you, Chairman Shays. And thank you for the opportunity to appear before you to discuss the Department's excess property systems. I'm grateful for the opportunity to provide the Department's views of the Government Accountability draft report, DOD Excess Property: Management Control Breakdowns Result in Substantial Waste and Inefficiency. Mr. Shays. I'm going to ask you to move the mic a little closer. Mr. Estevez. Yes, sir. My written statement, which I provided for the record, captures the number of the solutions we were implementing to improve the return supply chain as it applies to reutilization and disposal. Before I summarize a few key efforts that we have underway, I wish to commend the Government Accountability Office and specifically the audit team for the positive recommendations contained in the report. The Department is working to make those improvements in our excess property operations a reality. However, we are confident that our published policies regarding the Defense Reutilization and Marketing System across the system are sound. DOD policy states that material available in the disposition system will be used to the extent feasible to prevent buying and disposing of the same material simultaneously. While the return supply chain is the subject of this hearing, the return process is only a part of the supply chains that operate in the Department of Defense. The return process must be examined in the context of these DOD supply chain processes. Today, the Department's energies are focused on the front end of the supply chain where we have the greatest impact in supporting our forces. That is getting the warfighter what he or she needs as quickly as possible. Making sure that the right item is available causes us to stock inventory and safety stock worldwide, such as parts for airplanes that first flew in the 1950's, to leading-edge electronics and medical devices. I would like to highlight some of our successes in balancing support for the warfighter with efficient management of our resources over the last 3 years. We are supporting a deployed weapon systems quickly and effectively achieving 30 to 40 percent increases in material availability, a 70 to 80 percent reduction in lead times, and historically high levels of readiness for systems deployed in Iraq today, mostly through the use of performance-based logistics contracts. Material availability has increased for those items which the Department manages across the key supply chains that support weapon systems, commodity items and our deployed forces. Today, material availability for the Defense Logistics Agency is 88 percent, versus a target of 85 percent, and backorders has hit a historic low in March 2004. Through aggressive partnering with industry, DLA's cost recovery rate, as seen on the chart on the right, entitled DOD- DLA Cost Recovery Rates, are declining and are projected to continue this downward trend. Our inventory has decreased from a high of over $100 billion in the 1990's to slightly over $70 billion today, even with increased operations. The bottom line, we are improving all aspects of our inventory management process. The impact can be seen in the increasing levels of support provided to the warfighter. For example, I brought a chart that shows that we are decreasing Air Force non mission-capable rates by reducing backorders which are down 55 percent for Air Force items in the past 4 years. There are similar results for naval aviation as well. The Department also has numerous initiatives under way to increase support levels to the warfighter that will also reduce obsolete and excess inventory. For example, readiness-based sparing uses advanced information technology to make better sparing decisions and allocate our inventory investment to best support readiness. We have established commodity teams at the services and Department level to work with our supply base to reduce lead times and improve quality which will reduce the amount of safety stock we carry. We continue to push forward with continuous process improvement and Lean/Six Sigma across the Department. We also have significant efforts underway to upgrade and integrate our logistics systems. In the areas addressed by the report, our performance is comparable to commercial firms who consider excess and obsolete write-offs the necessary cost of satisfying customers. The audit pointed out that over $2.2 billion of items in A condition--those are serviceable items that are new, used repaired or reconditioned--was reported to disposal as excess for fiscal year 2002 and fiscal year 2003. The reserve actually represents 1.65 percent of our average inventory values for those years, which is comparable to industry figures. In most large companies, inventory reserves ranged from 2 to 4 percent depending on the industry, and we do well in comparison considering the challenging environment we work in. The report stated that we had $156 million per year in material losses. At 1 percent of the Defense Reutilization and Marketing Systems total volume, this is less than our commercial counterparts, as you see in the third chart. However, we realize there is much room for improvement, even though our excess property performance benchmarks well against industry. Let me highlight those actions I believe can better result in our reutilization supply chain. I had asked the military services and the Defense Logistics Agency to evaluate their training materials and practices so we can better assess root causes of the various documentation errors addressed by GAO. We will review the current processes and procedures to determine if there are opportunities for tighter controls and capture of information at point of return which will enable DMRS to better categorize inventory for potential reutilization. We are also investigating whether to create new condition codes that will allow us to track condition code A items that are obsolete. In addition, one way we are addressing GAO's finding that we purchase at least $400 million of identical items in fiscal year 2002 and 2003 by using available excess items in A condition is by linking DLA and service systems with our reutilization system as they undergo modernization. Each of these actions is a step toward improvement in the Department. I expect that the synergy of all of them together will go a long way toward addressing the GAO report's recommendations, improve our performance and, most important of all, enhance our support to our warfighters. Thank you for the opportunity to testify before the committee. I'd be happy to answer any questions. [The prepared statement of Mr. Estevez follows:] [GRAPHIC] [TIFF OMITTED] T2905.040 [GRAPHIC] [TIFF OMITTED] T2905.041 [GRAPHIC] [TIFF OMITTED] T2905.042 [GRAPHIC] [TIFF OMITTED] T2905.043 [GRAPHIC] [TIFF OMITTED] T2905.044 [GRAPHIC] [TIFF OMITTED] T2905.045 [GRAPHIC] [TIFF OMITTED] T2905.046 [GRAPHIC] [TIFF OMITTED] T2905.047 [GRAPHIC] [TIFF OMITTED] T2905.048 [GRAPHIC] [TIFF OMITTED] T2905.049 [GRAPHIC] [TIFF OMITTED] T2905.050 [GRAPHIC] [TIFF OMITTED] T2905.051 [GRAPHIC] [TIFF OMITTED] T2905.064 [GRAPHIC] [TIFF OMITTED] T2905.065 Mr. Shays. Thank you, Mr. Estevez. General Mongeon. STATEMENT OF MAJOR GENERAL DANIEL MONGEON General Mongeon. Good afternoon, Mr. Chairman, and distinguished members of the subcommittee. I am Major General Dan Mongeon, Director of Logistics Operations at the Defense Logistics Agency. I appreciate the opportunity to discuss the findings of the March 2005 GAO report and inform of you the actions we have taken and will take to improve our excess reutilization program. As the Director of Logistics Operations, I have staff responsibility for the procurement, management, storage and distribution of some 5 million line items of our military customers. The primary mission of DLA is to provide the best possible logistics support to America's warfighters. In accomplishing this worldwide mission, DLA uses four major supply centers, five DLA service centers, a distribution system with 26 depots, and a reutilization and disposal service with 92 defense reutilization and marketing offices [DRMOs]. DLA operates in 48 States and 28 countries. With me today is Colonel Pat O'Donnell, Commander of the Defense Reutilization and Marketing Service [DRMS]. Today we are here to discuss the economy and efficiencies of DOD's excess property reutilization program. DRMS has operational responsibility for the reutilization program and accomplishes this mission at 92 locations throughout the United States and in 15 foreign countries. Mr. Chairman, we concur with the recommendations of the GAO report. We recognize the issues identified in the GAO report and fully understand the importance of ensuring DOD has a viable reutilization program. The recommendations agree with a series of actions we had already initiated to increase management oversight and improve inventory management and property accountability of excess material. These actions include increased senior leadership involvement to monitor adherence with policy, guidelines and performance standards and quarterly progress briefings to the DLA director. We have also established a compliance assessment program geared toward policy oversight and monitoring the performance of DLA's reutilization and marketing program. We concur with the GAO conclusion that it is critical that services and DRMS ensure the proper assignment of condition codes. To address this issue, the Assistant Deputy Undersecretary of Defense for Supply Chain Integration directed the military services and DLA to review their procedures, provide accurate excess property return and documentation, and establish appropriate accountability mechanisms for the disposal of excess and surplus properties. To assist in this effort, I have directed the DRMS commander to work closely with the military services to improve training and awareness of the impact of inaccurate data. DRMS is developing property accounting courses for employees and supervisors as well as reviewing and upgrading its Web-based training tools for the services. GAO correctly recognizes deficiencies in our current automated systems and their impact on the concurrent purchase and disposal issue. Long-term solutions lie in emerging automated systems. Since 2004, DRMS has been working closely with DLA's business systems modernization design team to enhance support of the twofold mission of facilitating and reutilization of property in good condition and disposing of property DOD cannot use. A modernized disposal system will provide DLA with the ability to better manage both the near-term and long-term disposal needs of DOD. We agree with GAO's concerns regarding human capital shortages. DRMS has increased the use of contract employees, sent experienced personnel TDY to the most severely affected DRMOs and relocated some of our more experienced specialists. Also, the completion of the public-private A-76 competition will create an organizational structure that will consist of fewer DRMOs, ensure more efficient utilization of facilities and improve work load and management. Mr. Chairman, DLA's top priority is to support the American warfighter. We are confident increased leadership, oversight, changes in policy and procedures, modern business systems, and investment in human capital and resources will allow us to better use our resources and ensure America's fighting forces remain the best equipped in the world. I thank you, sir, and I would be happy to answer any questions. [The prepared statement of General Mongeon follows:] [GRAPHIC] [TIFF OMITTED] T2905.052 [GRAPHIC] [TIFF OMITTED] T2905.053 [GRAPHIC] [TIFF OMITTED] T2905.054 [GRAPHIC] [TIFF OMITTED] T2905.055 [GRAPHIC] [TIFF OMITTED] T2905.056 [GRAPHIC] [TIFF OMITTED] T2905.057 [GRAPHIC] [TIFF OMITTED] T2905.058 [GRAPHIC] [TIFF OMITTED] T2905.059 [GRAPHIC] [TIFF OMITTED] T2905.060 Mr. Shays. Thank you, very much, General. Colonel O'Donnell, sir, you're going to need to move the mic closer to you. STATEMENT OF COLONEL PATRICK E. O'DONNELL Colonel O'Donnell. All right, sir, Mr. Chairman, and distinguished members of the subcommittee, I am Colonel Patrick O'Donnell, Commander of the Defense Reutilization and Marketing Service and the Defense Logistics Agency. I appreciate this opportunity to address your concerns regarding the reutilization of DOD excess property in our efforts to improve inventory accountability in the efficient use of DOD assets. DRMS is responsible for the execution of DOD policy on the reutilization, transfer, donation, sale and environmentally compliant disposition DOD excess property. DRMS supports U.S. forces worldwide with personnel co- located with the military in Iraq, Kuwait and Afghanistan. We are committed to being good stewards of the property under our control and to ensuring compliance with DOD policies, guidelines and standards. We have implemented many initiatives that are at the forefront of reverse logistics. This includes processing demilitarization-required property at dedicated facilities to ensure proper disposition, using innovative processes for disposing of excess electronic equipment, and partnering with a private sector firm to sell property on a shared proceeds basis. In the past year, DRMS has implemented specific improvements to enhance reuse of excess assets within the Department, including providing DOD customers with additional online information and pre-receipt item visibility so that needed property can be redistributed quickly. We are working to ensure our systems and process improvements will become compatible and interactive with military services. The DOD reutilization system is trusted and regularly used by military service customers. And DRMS's reutilization and property disposal program performance measures demonstrate the quality of services provided. In fiscal year 2004, DRMS return over 160,000 line items with an acquisition value in excess of $1 billion to DOD activities. Additionally, in April 2005, DLA Office of Operations Research and Resource Analysis study supports DRMS's own analysis that its overall inventory shrinkage rate in fiscal year 2004 due to losses is well below 1 percent. DRMS recognizes its relocation of inventory accountability program can be improved. We are committed to correcting substandard performance and ensuring accountability while strengthening management controls to minimize such issues in the future. DRMS's actions to improve these programs include issuing a contract for commercial assistance in assessing and improving inventory data accuracy and developing additional internal audit capabilities, surveying significant generating activities to understand why property condition may be improperly classified, why local stock numbers are being used, and identifying barriers to using DRMS as a source of supply, meeting with DLA supply centers to discuss constraints they face in using DRMS as a source of supply and to develop program metrics and goals. DRMS is working with headquarters DLA to outline additional management controls and metrics to ensure proper inventory accountability and to synchronize the application of policy, oversight, education, training and program execution. We are also working to update our inventory accounting procedures, monitor inventory adjustments and losses, and reduce aging excess property and inventory and backlogs. DRMS spent $49 million in facilities upgrades in fiscal years 2000 through 2004 and plans to spend an additional $25 million in fiscal years 2005 through 2009. Mr. Chairman and distinguished subcommittee members, we recognize the issues noted in the GAO report and are taking appropriate measures to ensure they are corrected. DRMS stands ready to execute all policy and procedure changes that optimize the disposition of excess property. Thank you, Mr. Chairman, and I'm prepared to answer any of your questions. [The prepared statement of Colonel O'Donnell follows:] [GRAPHIC] [TIFF OMITTED] T2905.061 [GRAPHIC] [TIFF OMITTED] T2905.062 [GRAPHIC] [TIFF OMITTED] T2905.063 Mr. Shays. Thank you all very, very much. What is, in each of your judgments, the biggest challenge that you face? Mr. Estevez. Interestingly enough, Mr. Chairman, I believe that the two issues raised by Mr. Kutz are the same two issues I'm going to talk about. One is training, and the second is the integration of our systems. We have folks from military units turning in material most of the time that they no longer need so they want to get rid of it, turning it into folks at DRMS who are now expecting to make a judgment on the value of that material if it is improperly coded. So it is important for us to ensure that the folks that are turning in that material are trained properly to understand the entire lifecycle of that material and the importance of that material across the Department. And it is important that our DRMS folks are trained to also make a judgment about that material and challenge as appropriate. And in the commercial sector, turning in something to a retail outlet or a retail store, they send it back to someone to make those judgments. Second, we have to have the systems integration so that, when our wholesale system goes out and looks and says, what do we need to buy in order to fulfill a military requirement that has come in from the field, that it is automatic that something that was turned in through our reutilization process is on the books. And we are working to do that. And in fact, in January 2006, DLA's new Enterprise Resource Planning System will be integrated with the DRMS system so that those items that are turned into DRMS will automatically, that are in class A condition, that are in good condition, will be moved back into the inventory. General Mongeon. Sir, I would really echo those two comments. I think the training of both the services and also the DRMS personnel is absolutely key. And we have to be very vigilant in that area and continue to improve that training and make tools available to the services and to our employees so that they can improve the process. In terms of the systems integration, again, I totally concur with that comment. And we do have a fix on the horizon. There is really a long-term and a short-term approach. The short-term approach is in fact linking of the current management system, inventory management system, with the business system modernization and, as was mentioned by Mr. Estevez, that comes on line in January 2006. So those two would be the two key areas. The third one I would just comment on is the data validation. And we are working very diligently on that, in terms of improving our inventory accuracy and working a comprehensive program in terms of personnel training, inventory accuracy and accountability of our employees. Mr. Shays. Thank you, General. Colonel. Colonel O'Donnell. Sir, again, I think my comments would parallel those of Mr. Estevez and General Mongeon. Certainly, data reliability is of critical importance to us in the disposal business. We make all of our business decisions about what to do with property based on the information that we receive about the items that are turned in to us. Certainly that relates to the aspect of training that has already been mentioned. And again, the importance of having the systems integration that supports not only the buying of the property, the use of property, and ultimately the disposition of property, will take us a long way to sort of resolving all these problem. Mr. Shays. I would like to ask each of you, what you think the biggest success has been and your biggest failure. Not you personally, necessarily, but for the system. Mr. Estevez. I'm going to address this across-the-broad system, not just the reutilization system. I think we are doing a pretty good job. We can do better. But we're doing a pretty good job in getting the warfighter what he needs. We have decreased the time from moving high-priority shipments to our forces deployed in Operation Iraqi Freedom from about 30 days in shortly after the main operation ended to down to about 15 days today. In order to do that, we may end up having bought more than we need, but that is important. Because it is more important to have a soldier, sailor, airman, marine being able to sustain himself and to have those weapons platforms operating and to have a plane flying, than it is to have it down. Mr. Shays. I'm going to confirm that. And you can relate it to lots of different circumstances. You may invite guests to an event, and you can say, well, I'm going to have 30 people show up, but you buy for 40 because you don't want to have an undersupply. So I think it is a point that needs to be made. Sometimes we are going to have better excess supply than undersupply. That is OK. Mr. Estevez. So we are doing fairly well today moving stuff to support our Armed Forces in the field. On the reutilization side, I'll point out that we did reutilize about $400 million worth direct reutilization within the Department of Defense over the 3-year period and up to about $1 billion if you include some of those special program areas which are congressionally mandated and have the same rights as requisitioning material as Department of Defense agencies or units themselves. So we did over the period of time reutilize a good chunk of the material that came in. Now, obviously, we do need to do better on some of the other areas. We should not be buying $400 million at the same time. And those areas that I addressed previously, I believe will go a long way toward fixing those. Mr. Shays. So is your biggest failure the buying of $400 million that you shouldn't have been buying? Mr. Estevez. I believe that buying concurrent with things that we are using in the inventory is our biggest failure. Mr. Shays. And tell me why you think that is going to be reduced? Mr. Estevez. That goes back two reasons, one goes back to, we need to train better so that they identify, but really, if you make those system interfaces that we discussed so that the buyer, who is processing numerous orders, doesn't have to think, it is an automatic link between his system that he is looking in to see what inventory we have in the wholesale system and what is in our reutilization system is automatically linked, so that he doesn't think it is bought and it is on the books. Mr. Shays. And that interface, though, that is nothing I see happening all that quickly. What part is being interfaced you say January. Mr. Estevez. January 2006, will be an interface between DLA's system that they are fielding, their enterprise planning system called Business Modernization System, and the system that Colonel O'Donnell operates called Daisy. Mr. Shays. It will begin, or it will be up and running fully implemented? General Mongeon. It will be fully implemented. The design has already been worked out, has been completely designed, and now, as we go to the 2.2 roll-out of our business system modernization process, it will be implemented. And you will have that automatic link. Mr. Shays. So, General, tell me the thing that you're most proud of or you consider the biggest success and what you think the biggest failure has been? General Mongeon. I think the biggest success has been DLA's continued business process improvements. You heard some of those numbers as it related to our highest level of supply available in terms of supporting our warfighters, our lowest level of back orders, direct impact on readiness of our forces as well as reducing the cost, the overall cost, of operating the Defense Logistics Agency. And you've seen that on those charts. In addition to that, our overall ability to work aggressively in terms of taking on inventory accountability. As recently as 2002, our adjustment rate was 19 percent. Today, in second quarter of fiscal year 2005, that has been reduced down to less than 5 percent, 4.6 percent. So taking on very seriously recommendations made on inventory accountability and working that very hard. Mr. Shays. Tell me again the percent of what? I'm sorry. General Mongeon. These are adjustment to inventory. In 2002, for our distribution depots, our adjustments to inventory was running at 19 percent. Today, after some very aggressive inventory accountability measures, training, holding personnel accountable, that has been reduced down to, in this second quarter of fiscal year 2005, to less than 5 percent, specifically 4.6 percent. In terms of improvements, where we could have improved better or faster, I think it is in business systems modernization. I think it is the linkage between, as you heard, or the integration of the systems, so that we get a higher correlation between what is being purchased and what is being turned in in condition code A. We have moved very fast. But it would have been great if we could have moved even faster to accommodate that linkage. Mr. Shays. So, OK, I don't want to minimize the failures. In other words, your recognition of the failures, and I don't want us to be like, I asked someone what their biggest failure was or their biggest liability when I was hiring them, and they said they were too friendly. I want to have a better sense of what you think your biggest disappointment, or maybe it is redundant, so give me your second biggest disappointment. I want to have a sense that you have a sense of the failures. General Mongeon. Well, I think in terms of what I just stated, sir, is in relationship to, as was stated by Mr. Estevez, was in relationship to the $400 million that were concurrent purchases. And I was relating that to our business systems modernization. If we were able to move faster on that, we potentially could have avoided the vast majority of that concurrent purchase. Mr. Shays. But you think, do you think that actually gets resolved in just 6 months? General Mongeon. In terms of linking the visibility of condition code A items that are turned in to the individuals, the inventory item managers that are purchasing that items, we will be able to link the two together. So he or she will be aware that those items are available, can look to see if they in fact are in condition code A and then make those issues from those items as opposed to turning them in as excess. Mr. Shays. You are making, Mr. Estevez, Deputy Undersecretary, you were making a statement you turned a negative into a positive, and that may be very fair, but you basically said we wouldn't have known about the $400 million if we hadn't done what? I thought I was inferring from you that you were saying that even the fact that we--maybe someone else made that point--that we would have not have been able to have had any statistics on the $400 million had we not had something else in place. Am I, was that something I just invented from something you said? Mr. Estevez. I'm struggling. Because I don't remember saying exactly that. But I did point out that was, in my view, our biggest failure. And as General Mongeon just alluded to, I view making that systems integration, it is one of the keys, it is probably the key to making that fix, but I do have to point out that the training has to be in place because you have to code it properly to enter it into the system. So it has to be turned in at condition code A, identified as condition code A and logged in to the reutilization system as condition code A for it to move up into the higher system as available for reuse. Mr. Shays. Do we put bar codes on our products so that you just scan them in? Mr. Estevez. Depending on the, you know if it comes in, its performing original package, it is going to have some kind of marking on it. Mr. Shays. So you don't have to manually do it? Mr. Estevez. If it is a weapons platform, if it is a part for a weapons system, it is going to have a part mark on it. Some today have none, that you have to code it in. We are moving so that you have to scan everything in. And we are also moving toward the use of radio frequency identification across our supply chain so that it becomes an automatic entry into our inventory systems. Mr. Shays. Colonel, the thing you're the most happy about and the thing that troubles you the most. Colonel O'Donnell. Sir, I guess the thing that I'm most pleased with---- Mr. Shays. Move the mic just a little closer to you, sir. Colonel O'Donnell. I think the thing that I am most pleased with overall is the value that DRMS and Defense Reutilization Marketing Service brings to the Department in terms of its ability to execute a fairly wide range of complex tasks. As I indicated in my opening remarks, we're responsible for not only selling property and reutilizing it, making sure that it is used as effectively as possible, prior to it having to be demilitarized, and our role in the environmental compliance as it relates to DOD's hazardous waste and hazardous materials excess, but those are tough challenges. And the men and women who make up DRMS do a yeoman's job in making those kinds of things happen day in and day out. I think the area we struggle with the most, quite honestly, is our ability to keep our employees as well trained as we absolutely need to in light of changing regulation at the Federal level, within the Department, to give them the best rules and tools that we can in order to enable them to perform their daily tasks at a level that is consistent with what is expected of us. Mr. Shays. So you say training is your biggest disappointment? Colonel O'Donnell. Yes, sir. Yes, sir. Mr. Shays. Fair enough. Before I go to our professional staff, we breezed through these charts. And, they're very familiar to you but I don't know what is on the access and so, so just, if you would, and Mr. Secretary, start with the DLA cost recovery rates are declining. Mr. Estevez. Simply. DLA works in a working capital fund. So they're funded through sales to the military services. Mr. Shays. Right. Mr. Estevez. Through the recovery costs of those sales. So back in the 1992 timeframe, that cost recovery was up to about $33. Mr. Shays. And the years are on your chart? Mr. Estevez. Yes. As you can see, the cost recovery rates have been declining. Mr. Shays. Define cost recovery rates to me. What is it? Mr. Estevez. That is the cost above the actual purchase price of an item that DLA sells it to the military services; DLA's working capital funded. Mr. Shays. Give me an example. Mr. Estevez. If DLA buys a part for a helicopter at $10, they will sell it at now $11.50 rather than $20 some years ago. That is how DLA operations are funded, through an additional tack-on on top of the cost of the price to the service. Mr. Shays. OK. I'm so sorry, but I'm not understanding the cost. I must be thinking of it in reverse. Mr. Estevez. DLA buys from a vendor, from Boeing, Lockheed, whoever, at $10, and they'll sell it to the service at $12, to the Army at $12. The Army gets appropriated funds from the Congress to buy those items at that rate. Mr. Shays. At $12. Mr. Estevez. At $12. If DLA reduces the costs that it can charge in overhead---- Mr. Shays. So these are overhead costs? Mr. Estevez. Yes, sir. These are overhead costs. So DLA is becoming more efficient, and then the service has more dollars to buy. Mr. Shays. I didn't realize--these are basically overhead costs? Mr. Estevez. Yes, sir. Mr. Shays. And you're getting your overhead costs down? Mr. Estevez. Yes, sir. Mr. Shays. And we can assume these are fairly reliable statistics? Mr. Estevez. Absolutely. The second chart shows Air Force mission-capable rates, the correlation between mission-capable rates of weapons systems-- and that is a generic across the Air Force, so it is not for a particular aircraft--and the reduction in back orders. So if I don't have an item on back order--in other words, you're waiting for the item because it is not in the inventory, and it is not available from the industrial base--I have weapons systems that are sitting idle. If I decrease the back orders and get that material out to the force, I am decreasing the amount of mission-capable rates of the weapons platforms. So I'm getting better utilization of the material that the Department has bought for use to defend the American people. Mr. Shays. And the third one? Mr. Estevez. And the third one shows industry averages, by year, of what the industry would call shrinkage, how much the industry loses. And that is not just in retail operations. That is across, you know, warehousing and, for specific industries, and of course, we are a mix of industries, but industry average is, as you can see, about 1.7 percent across the board, and in our DRMS, we are down to about 1 percent, and that relates on the $466 million. Now that is not to say that we want to live with having a 1 percent unaccountable rate. We of course want to have a zero unaccountable rate. Mr. Shays. Yeah. Let me just tell you how we will proceed, and I think this will be a good way. General, you basically have said we can look in 6 months to some integration of systems, and it would seem to me and you said it will be online running, so I assume you'll start to process it in before. So if we had a hearing a year from now, will you all be in that same capacity a year from now or will we be dealing with different people? General Mongeon. I will not be. No, sir. Mr. Estevez. It is my plan to be, sir. Mr. Shays. Fair enough. That's good. Colonel. Colonel O'Donnell. No, sir. I will not then either. Mr. Shays. That triggers the question, what is the amount of time that someone serves in a capacity like you're in General. General Mongeon. Normally 2 years. Mr. Shays. Colonel. Colonel O'Donnell. Two years sir. Mr. Shays. Just, that is probably unfortunate, frankly, you know, but at any rate, your predecessors are going to either say, well, the General is right or he is wrong. Because we are going to get you back here, or your replacements, in a year, and that hopefully we will have a good story to tell. Hopefully, we will have a good story to tell. General, when would you be leaving? What is your---- General Mongeon. Sir, I'll be leaving around October of this year. Mr. Shays. Well, we may have you be a duplicate witness here, so don't hide from us. We're going to have the professional staff ask a few questions. And what I would like GAO to do, and I appreciate your staying, I would like you to just, you know, at the end, just say the things that, just comment on what you've heard in this testimony. Yes. OK. Mr. Chase. Either to the general or to Mr. Secretary Estevez. One of the previous witnesses, Mr. Rhodes, suggested an improvement might be linkage between the excess property system and the acquisition systems, so there was no--in a sense--put in a lockout system. Did you have any thoughts about his recommendation. General Mongeon. Let me start out. Essentially that system modernization, that linkage between the inventory system that the DRMS is currently using, Daisy, linked to DSM, what that does is it identifies to the item manager that those items would be in condition code A, and that he should automatically put those in stock. Now, there are criteria for that in terms of his--where his position is. But if he is going to buy it within the next 6 years, then it's going to automatically put it in stock. Mr. Chase. OK. Going back to the systems, then, you have indicated that January 2006 you expect completion. Now, in your response to GAO, in the recommendations regarding inventory management improvements, you mention something about full operational capability for the DRMS RMP will be realized in fiscal year 2009. Could you explain what that is, and tell us whether that can be implemented any sooner than fiscal year 2009? General Mongeon. That is the long-term plan in terms of modification of the reutilization system; so that is coming on board after Business System Modernization. So that's the major integrated program for the Defense Logistics Agency, BSM. The long-term solution comes on with an implementation date of 2009, so it's a more comprehensive, more sophisticated capability. Pat might want to add something in addition to that. So we have a near-term fix, which was mentioned by GAO as being very important, and we have a long-term fix, and the combination of those two give us where we think we need to be. Mr. Chase. What happens if the Business System Modernization program is delayed? They're still trying to count the number of systems they have on hand. General Mongeon. We are in the process of rolling out our Business Systems Modernization as we speak. We have met every milestone, so that is going very successfully. We are integrating about 200 customers every month, 200,000 items. We are learning in that process, and right now that is a very successful program rollout. So we have a considerable amount of time under our belt right now, and we anticipate that success will continue throughout the final rollout of the Business System Modernization. Mr. Estevez. Just to clarify there. DLA has one instance of a system that's being modernized, they're rolling out a resource planning solution. That is not the overall business management systems of the Department of Defense. That's their instance of it, and obviously that doesn't take into account all the finance systems in the Department or the logistics systems. DLA's rollout, for what is a commercial product, is the largest rollout of that product, as is the Army-specific rollout. And these are products that are out in the commercial sector and regularly used. Mr. Chase. I'm curious. I don't understand how brand-new material, unused, new, ``A'' condition material can be scrapped or junked. Could you explain that? I'm not sure I understand how something new is scrapped or is junked. Mr. Estevez. There's a number of reasons why. We have the two issues; we have stuff that we're buying concurrently, and then we have other stuff that's in A condition that may be--I won't call it junk--that we either donate out to other agencies, or is used somewhere else in the Federal Government, or it could end up being sold. It has to do with what's the admission of the Department, what is the status of that item. It can be a new item that we potentially could have bought and now have a technological upgrade so we no longer need that. We no longer use the old body armor; we use the new body armor because it has better protective capabilities for our forces. Mr. Shays. So what you're saying is if you have old body armor that's new, it's not that it's---- Mr. Estevez. That's correct. And there is--that applies across the board. An upgrade in something, we want our forces to have the best that's available. And in certain instances, if it's a modernization of a weapons platform, then the old stuff is no longer needed even though it's still in new condition, because we just did a mod on the platform. Mr. Chase. Well, I understand the body armor example, but what about the tent example? General Mongeon. I would say in terms of the tent example, it's one of those areas where it was the condition code; the condition code was marked condition code H. That is part of what we have all said is in fact a training issue, and we have to work very closely with the services and with our personnel to ensure that those items are coded correctly. That is an item that we are still buying, not in large quantities, but the fact of the matter is they in fact were condition-coded items turned in, and that we should be able to pick those up. And they should have been in condition code A, marked in condition code A, so that then would have had the visibility potentially as an example on a want list. We have some automated processes, you can go to the Web; organizations have a want list. So let's say somebody needed those tents for reutilization. If it had been turned in in condition code A and it had been on their want list, it would have automatically linked up and they would have been able to get it. So going back to what Mr. Estevez said, going back to what Colonel O'Donnell said, training and adherence to making sure that the proper condition code is marked on these items is very important. Mr. Chase. When did you implement the want list program? Colonel O'Donnell. Sir, the want lists have been in effect for over a year now. And it's a tool; again, a way of trying to enhance our overall reutilization program by giving our customers, across the spectrum of military organizations, the ability to tell DRMS the kinds of property they need and the types of quantities that they're looking for. They can come on our Web site, give us that product, which then is screened against our inventories for a prescribed period of time, hopefully with the expectation of fulfilling the requirements. Mr. Chase. OK. GAO raised the question of restricted items that they were able to obtain. Why isn't DLA able to restrict unnecessary purchases? Colonel O'Donnell. Let me go ahead and answer that one, sir. NonDOD entities within the Federal Government can, in fact, acquire restricted property through a reutilization, or the RT program, reutilization and transformation and donation program, depending on where they fit in terms of eligibility. The decision to release property which has some sort of restrictive characteristic rests with GSA, who has proponency for property utilization throughout the Federal Government, which would account for why GAO could use their DODAC to come in and requisition that property. Mr. Shays. Could you just explain it? GSA, outside of DOD, doesn't have ownership of this; they have to give approval to another government agency to buy something from you? Colonel O'Donnell. They have to give, sir, approval for a nonDOD organization to withdraw property from DRMS that has a restrictive characteristic. Having said that, they are also obliged to tell that organization that they have to sign a statement that says you recognize that this item, for example, has a DRMO requirement and that you will abide by the tenets of that DRMO requirement when you, in turn, get ready to dispose of that property. But GSA is the proponent, if you will, for property reutilization throughout the Federal Government, and they are delegated that responsibility for DOD down to the Defense Logistics Agency. Mr. Shays. Is it your testimony that GAO would not have been able to buy that restricted property--excuse me, correction. I will say it just this way: Is it your statement that the only way GAO was to buy this restrictive property is because they were GAO, and that they would not have been able to buy it if they had tried to buy it privately? Colonel O'Donnell. That's correct, sir. Those items up on the podium there were requisitioned through DRMS, using a DODAC that had been assigned a Department of Defense activity address code that had been assigned to GAO, enabling them to acquire property from us. Mr. Chase. Colonel, could we move on to the point that the GAO made regarding the storage of material that was destroyed or weather damaged? They specifically said in their report, property was improperly stored outside for several months at the Huntsville liquidation sales location and I guess was damaged due to the hurricane. Have you gotten a handle on how you could prevent that in the future? Colonel O'Donnell. Sir, the situation that was described in the GAO report with respect to our facility down in Huntsville has, in fact, been corrected. It was a--the result, rather, of a series of events that sort of cascaded upon themselves. First and foremost was that the team that we had down at our sales partners office at Huntsville was unable to keep up with the volume of property that was coming to them in terms of their ability to sell it and to turn it over at a sufficiently rapid rate that would ensure that all the property they were receiving could, in fact, be stored inside. They made some decisions that particular management team at that particular site needed to be replaced, and they have, in fact, done that. We, DRMS, have put some additional manpower down at Huntsville to help monitor what is going on, not only within our sales partners operations, but how that all relates back to the flow of property from DLA depots. As to the fact that we had property stored outside which ultimately was weather damaged, again, that was a function of there being more property in the pipeline than our sales partner could deal with based on the skills, I guess, and the ability of the team that they had on board at the time. Again, we've rectified that. We've worked with our sales partner, they have made some significant improvements in terms of the caliber of folks that they had down there. And the problem that existed at the time of the audit no longer exists. Mr. Chase. So I understand that was a private contractor that was responsible for that location? Colonel O'Donnell. For the sales operation co-located at our DRMO at Huntsville, AL, yes, sir, that is correct. Mr. Chase. Were we--or have we considered trying to recover some of the acquisition value for that material from the contractor? I mean was it--you know, was it something that he could have prevented that maybe we should try to recover? Colonel O'Donnell. In this instance, no, sir, I don't think that's the case at all. I mean, the fact is there was more property coming his way than he had the capability at the time to deal with. But by the same token, we had a responsibility to say there is more property in the pipeline, let's divert that to another location. Which ultimately we wound up doing to help solve that particular situation. Mr. Chase. Another point raised in the report was the issue of missing items, 72 chemical and biology protective suits, protective gloves, weather parka. Given the losses that GAO identified, what is DLA's criminal investigative agency doing to access the DRMO's security and vulnerability? Colonel O'Donnell. Sir, the DLA Criminal Investigative Agency routinely conducts criminal vulnerability assessments of our DRMOs. And I can't speak in this particular instance, but those inspections take place on a routine basis; they put a team of investigators down there, and they look at our operation from the standpoint of what process improvements do we need to make, what do we need to do in terms of improving physical security, the way we handle property, the way we account for property. And we find those to be very, very useful tools. General Mongeon. If I might just expand on that point. The JS list very specifically--and I think comments were made by GAO in terms of when they went on to look since the last time of the hearing when what was discussed, they found all those items being available. There have been very aggressive actions taken, and there is an organization called the Joint Service MBC Equipment Assessment Team. All of that equipment and MBC- related items now flow to those four sites. And in the past, a very avowed criticism that those items were in batch lots and they were coming in; and thus you did not have the direct accounting of those, because they might have said I turned in 50 suits, and there might be more pants than jackets, etc.; that process was ongoing during that investigation. We no longer accept batch lots. All of the items that are now turned in, JS lists, are reviewed at those sites. They make the determination if they are serviceable for reutilization. In the last year, they have determined about $1.3 million worth is for reutilization; if it is not for reutilization in terms of being able to be used, then it is marked clearly for training. And if it is unserviceable, then it is turned in to be destroyed. I think that is one of the examples of where DRMS has taken and the services have taken the recommendations of the committee very seriously. Mr. Chase. That just raised another point. Have any more of the 250,000 BDOs turned up, the defective BDOs? General Mongeon. Not to my knowledge. Not to my knowledge. Mr. Shays. We're going to close up here. But let me be clear. From each of you, is there anything that GAO said-- you've said what you've agreed with in the recommendations; is there anything in the testimony they gave today that you would take issue with or would choose to qualify? I mean, we qualified one--and I would like GAO to respond--that the restrictive items that they got, they were able to get not as private citizens but as a government agency. Still, they shouldn't have gotten it. What use did it have to them? But is there anything else that you would have disagreed with what they said? And then I'll make the assumption that you agreed with what they said. I mean, you were here listening to some pretty hard stuff. Or any members, what I said, or anyone else said? Mr. Estevez. With regard to what is called waste, the stuff that we no longer need that goes out to--and again, I'm not talking about things that we do concurrent buys on. If we no longer need it in the Department and we excess it and it is reutilized either by some of the congressional mandated agencies that have the same rights to the materials that the Department of Defense has, or if it goes out to first responders or States or some other people that review that, that's valid use of that; and, in fact, it's helpful to the American taxpayer in many instances, or State taxpayer as the case may be. The other stuff that we no longer need that goes for sale through our government contractor, we believe we are getting the best price available. That goes for open auction. And we have two choices at that point. You can either not sell it and hold it, and there is a cost related for doing that; or you can get it off our books and off our management control because we no longer need it, and get the best return on the dollar that we can get at that point. So I'm not sure what--we keep hearing the pennies on the dollar point, but we are getting the best value that we can get through that open auction at that point, without holding that material for an undisclosed amount of time. So I just want to characterize what is being called ``waste,'' as we view if we no longer need it, we're getting the best return that we can possibly get on that. Mr. Shays. OK. Colonel, anything that you would--Colonel, anything that you would want to take issue with or that you want to qualify that you heard from the previous panel or any Member of Congress? Colonel O'Donnell. Yes, sir. I think that Mr. Estevez has said the point that I would have made exceptionally well. Mr. Shays. If I could have GAO just join, and this is not a debate--I'm sorry, General. General Mongeon. I did have one comment, sir. Mr. Shays. I'm sorry, I didn't mean to overlook you. General Mongeon. The comment I would make is--and I use the gasoline burner unit as an example. While the gasoline burner unit is in condition code A, there is a modernization program going, and it happens to be called the modern burner unit. So as units are deploying, they are being fielded, the new item. And so while we have in fact sold a very small amount of these burners and buy a very small amount, we are in a transition program. And I think what you find in a number of these programs, a number of these areas, that you're in a transition program. So the units that we're deploying, the forces that we're deploying, we're deploying with the modern burner unit, the replacement for that. That gasoline burner is still a condition code A item, but in fact it is not the most modern item. With an example that was mentioned for the NSA computers, and just to embellish the point that Mr. Estevez made, in fact the LESO that was able to get those computers, they in fact are 1 of the 12 congressionally mandated programs that in fact have access to it on an equal footing with the Department of Defense. Mr. Shays. Right, OK. Mr. Kutz, just tell me, from the testimony you heard here-- and this is not--this is a dialog, not a debate. But help me kind of sort things out; what would you find--is there anything that was said that basically you would want to give us your perspective that would differ? Or, for the most part, do you concur with the comments that were made? Mr. Kutz. For the most part. I would say a couple of things. The issue of shrinkage. I mean, I understand the perspective of the 1 percent, and we didn't look at it from that perspective necessarily, but it is important to note that we are still talking about things like body armor, aircraft helicopter parts, chem-bio suits and circuit cards. I'm not sure that is a relevant apples-to-apples comparison completely to say that this excess property system in the military losing things is the same as the retail entity losing things. So I think that's a broader perspective I would have on that issue. With respect to the items that we've requisitioned--and maybe we weren't clear in our testimony that we had requisitioned those because we didn't pay anything for those except a little bit of shipping. It was really the medical instrument chest and the parts supply and the circuit cards, we requisitioned those at GAO, whereas everything else we bought on the Internet with our undercover credit card. Mr. Shays. What were the two that you did at GAO? Mr. Kutz. Well, there were three; there were the parts supply, the circuit cards--exhibit 3 and 2 over there--and then the medical instrument chest. Mr. Shays. Is there any restricted item that you got not through GAO but as a result of just private citizen--your card? Mr. Kutz. No, I do not believe so. Mr. Shays. I mean, I just think that's important to point out. These still are restricted items, but it's not like I could have gone on and gotten them. I was thinking that, you know, in your work, if you assign people to look at something, in a way you almost hope they find it so you feel like you are accomplishing something and doing your job. But I would think your biggest satisfaction would be when you come back here a year from now--I didn't ask you; will you be in your position a year from now? Mr. Kutz. If you would like us to do certain studies. If you want us to test their system in January or whatever the case may be, we will work with you on that. Mr. Shays. I want to come back a year from now. And I would think your biggest satisfaction would be to--and maybe not to the extent that you did--but test the system out again, and to find that you didn't--you weren't as successful in breaking through the system or finding things that were being sold that were also being purchased. I mean, if that system works, General, as you hope, I would think that frankly that would say to GAO, gosh, we accomplished something. That would be my view. Mr. Kutz. Absolutely. We would agree with that. Mr. Shays. And General, if whoever takes your place comes back here--and Mr. Estevez, you will be here--and if we have the same story, I will feel like we failed. I will feel like all of us failed. So I hope we see some good success here. Is there anything, gentlemen, that we should have asked that we didn't ask that you want part of the record? Mr. Kutz, anything that you want to conclude with? Well, again, thank you for your service, and we will hope that we see some significant progress. Thank you. This hearing is adjourned. [Whereupon, at 4:43 p.m., the subcommittee was adjourned.] <all>