<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
______
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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:]
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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:]
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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:]
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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:]
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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:]
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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:]
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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.]
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