[House Hearing, 107 Congress]
[From the U.S. Government Publishing Office]
DOD FINANCIAL MANAGEMENT: FOLLOWING ONE ITEM THROUGH THE MAZE
=======================================================================
HEARING
before the
SUBCOMMITTEE ON NATIONAL SECURITY,
VETERANS AFFAIRS AND INTERNATIONAL
RELATIONS
of the
COMMITTEE ON
GOVERNMENT REFORM
HOUSE OF REPRESENTATIVES
ONE HUNDRED SEVENTH CONGRESS
SECOND SESSION
__________
JUNE 25, 2002
__________
Serial No. 107-208
__________
Printed for the use of the Committee on Government Reform
Available via the World Wide Web: http://www.gpo.gov/congress/house
http://www.house.gov/reform
U.S. GOVERNMENT PRINTING OFFICE
WASHINGTON : 2003
86-962 PDF
For Sale by the Superintendent of Documents, U.S. Government Printing Office
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COMMITTEE ON GOVERNMENT REFORM
DAN BURTON, Indiana, Chairman
BENJAMIN A. GILMAN, New York HENRY A. WAXMAN, California
CONSTANCE A. MORELLA, Maryland TOM LANTOS, California
CHRISTOPHER SHAYS, Connecticut MAJOR R. OWENS, New York
ILEANA ROS-LEHTINEN, Florida EDOLPHUS TOWNS, New York
JOHN M. McHUGH, New York PAUL E. KANJORSKI, Pennsylvania
STEPHEN HORN, California PATSY T. MINK, Hawaii
JOHN L. MICA, Florida CAROLYN B. MALONEY, New York
THOMAS M. DAVIS, Virginia ELEANOR HOLMES NORTON, Washington,
MARK E. SOUDER, Indiana DC
STEVEN C. LaTOURETTE, Ohio ELIJAH E. CUMMINGS, Maryland
BOB BARR, Georgia DENNIS J. KUCINICH, Ohio
DAN MILLER, Florida ROD R. BLAGOJEVICH, Illinois
DOUG OSE, California DANNY K. DAVIS, Illinois
RON LEWIS, Kentucky JOHN F. TIERNEY, Massachusetts
JO ANN DAVIS, Virginia JIM TURNER, Texas
TODD RUSSELL PLATTS, Pennsylvania THOMAS H. ALLEN, Maine
DAVE WELDON, Florida JANICE D. SCHAKOWSKY, Illinois
CHRIS CANNON, Utah WM. LACY CLAY, Missouri
ADAM H. PUTNAM, Florida DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia ------
JOHN J. DUNCAN, Jr., Tennessee BERNARD SANDERS, Vermont
JOHN SULLIVAN, Oklahoma (Independent)
Kevin Binger, Staff Director
Daniel R. Moll, Deputy Staff Director
James C. Wilson, Chief Counsel
Robert A. Briggs, Chief Clerk
Phil Schiliro, Minority Staff Director
Subcommittee on National Security, Veterans Affairs and International
Relations
CHRISTOPHER SHAYS, Connecticut, Chairman
ADAM H. PUTNAM, Florida DENNIS J. KUCINICH, Ohio
BENJAMIN A. GILMAN, New York BERNARD SANDERS, Vermont
ILEANA ROS-LEHTINEN, Florida THOMAS H. ALLEN, Maine
JOHN M. McHUGH, New York TOM LANTOS, California
STEVEN C. LaTOURETTE, Ohio JOHN F. TIERNEY, Massachusetts
RON LEWIS, Kentucky JANICE D. SCHAKOWSKY, Illinois
TODD RUSSELL PLATTS, Pennsylvania WM. LACY CLAY, Missouri
DAVE WELDON, Florida DIANE E. WATSON, California
C.L. ``BUTCH'' OTTER, Idaho STEPHEN F. LYNCH, Massachusetts
EDWARD L. SCHROCK, Virginia
Ex Officio
DAN BURTON, Indiana HENRY A. WAXMAN, California
Lawrence J. Halloran, Staff Director and Counsel
J. Vincent Chase, Chief Investigator
Jason Chung, Clerk
David Rapallo, Minority Counsel
C O N T E N T S
----------
Page
Hearing held on June 25, 2002.................................... 1
Statement of:
Boutell, JoAnn, Director, Commercial Pay Services, Defense
Finance and Accounting Service, Department of Defense;
Douglas Bryce, Program Manager, Joint Service Lightweight
Technology Suit, Department of Defense; and Bruce E.
Sullivan, Director, Joint Purchase Card Program Management
Office, Department of Defense.............................. 93
Coyle, John J., Department of Business Logistics,
Pennsylvania State University.............................. 51
Kutz, Gregory, Director, Financial Management and Assurance
Team, U.S. General Accounting Office, accompanied by David
Warren, Director, Defense Capabilities and Management Team;
Darby W. Smith, Assistant Director, Financial Management
and Assurance Team; and John Ryan, Office of Special
Investigation.............................................. 10
Letters, statements, etc., submitted for the record by:
Boutell, JoAnn, Director, Commercial Pay Services, Defense
Finance and Accounting Service, Department of Defense,
prepared statement of...................................... 95
Bryce, Douglas, Program Manager, Joint Service Lightweight
Technology Suit, Department of Defense, prepared statement
of......................................................... 101
Coyle, John J., Department of Business Logistics,
Pennsylvania State University, prepared statement of....... 54
Kutz, Gregory, Director, Financial Management and Assurance
Team, U.S. General Accounting Office, prepared statement of 13
Shays, Hon. Christopher, a Representative in Congress from
the State of Connecticut, prepared statement of............ 3
Sullivan, Bruce E., Director, Joint Purchase Card Program
Management Office, Department of Defense, prepared
statement of............................................... 141
DOD FINANCIAL MANAGEMENT: FOLLOWING ONE ITEM THROUGH THE MAZE
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TUESDAY, JUNE 25, 2002
House of Representatives,
Subcommittee on National Security, Veterans Affairs
and International Relations,
Committee on Government Reform,
Washington, DC.
The subcommittee met, pursuant to notice, at 10:04 a.m., in
room 2154, Rayburn House Office Building, Hon. Christopher
Shays (chairman of the subcommittee) presiding.
Present: Representatives Shays, Gilman, Lewis, Kucinich,
Schakowsky and Tierney.
Staff present: Lawrence J. Halloran, staff director and
counsel; J. Vincent Chase, chief investigator; Thomas Costa,
professional staff member; Jason M. Chung, clerk; David
Rapallo, minority counsel; and Earley Green, minority assistant
clerk.
Mr. Shays. I'd like to call this hearing to order and
welcome our witnesses and guests. I always feel ``got'' when we
have the military and we don't start promptly on time, but 5
minutes ain't bad, I guess.
Two weeks ago the General Accounting Office, GAO, and the
Department of Defense, DOD, gave us a high-altitude view of the
Pentagon's tangled antiquated web of more than 1,200 financial
management systems. Today we journey deep into the microcosm of
DOD accounting to take a much closer and more detailed look.
Last year after the Comptroller General again declared DOD
financial systems posed a high risk of waste and abuse, our
subcommittee ranking member, Congressman Kucinich, suggested it
might be both instructive and constructive to follow one item
from the initial idea all the way through to procurement and
operation, so we asked GAO to track the accounting path of a
DOD-unique item, the Joint Lightweight Integrated Suit
Technology, referred to as JSLIST, chem/bio protective
garments; and a second item, one commercial computer item
obtained using a DOD purchase card.
The case studies GAO will discuss today bring some DOD
financial and inventory management deficiencies into painful
and, frankly, horribly sharp focus. Purchase of the military's
newest individual protective equipment is hobbled by needless,
complex, repetitive, largely manual, error-prone systems.
Despite pledges to this subcommittee 2 years ago to fix
scattered inventory controls, DOD still cannot provide a real-
time accounting of the location and condition of critical
protective equipment.
As a result, some military units have formally declared
JSLIST garments surplus, while others cannot get enough suits
for training. While DOD is scheduled to procure 2.8 million
more JSLIST units for approximately $100 each, GAO found 917 of
the 1.2 million already purchased had been auctioned on the
Internet for less than $3 each.
This form of waste directly affects readiness. When the
chemical alarms again sound in the desert, U.S. forces will
need those suits. Transformation of DOD's last-century
financial management systems into a 21st century enterprise
architecture is a critical element of their ability to survive
and prevail against tomorrow's threats.
Joining us today are representatives of the Department of
Defense, the GAO, and an expert in business processes, to
discuss and evaluate the flow of information through the
various systems used to procure, pay for and deploy the joint
lightweight integrated technology suit, and a computer hardware
item procured from a local vendor using the government purchase
card.
We truly thank all of them for being here and for
contributing to our continued oversight of DOD financial
management and inventory control systems. And let me just say
given that it seems so obvious that we have a gigantic
challenge, we aren't up here throwing grenades down on our
witness table. We understand that everybody wants to get this--
a handle on this issue. We need to make sure it is the highest
priority of DOD. That is part of the motivation of why Mr.
Kucinich and I want this hearing. We realize there are men and
women of good faith who are trying to deal with this issue, but
we're going to be brutally honest with each other in terms of
what the challenges are and how we deal with it. This just
simply can't continue and continue and continue.
So at this time I thank my colleague, Mr. Kucinich, for
requesting this hearing, and give him the floor.
[The prepared statement of Hon. Christopher Shays follows:]
[GRAPHIC] [TIFF OMITTED] T6962.001
[GRAPHIC] [TIFF OMITTED] T6962.002
Mr. Kucinich. Hi. I want to thank the Chair for the
opportunity to work with you on this and so many other hearings
of importance to this country, and I'm appreciative of the
Chair's leadership in that regard.
The point of GAO's investigation, which you and I requested
in a bipartisan manner, was a straightforward one, to track a
single procurement item through the maze of different
accounting, inventory and financial management systems at the
Department of Defense. When we first requested this study, I
expected the exercise to illustrate in a very simple yet
compelling manner the duplication, waste and inefficiency that
has plagued the Pentagon's management systems. As a
subcommittee, we've heard many, many times about the horror
stories at the Pentagon, the lack of coherent inventory
control, the proliferation of stovepipe procurement systems,
and the absence of any rational visibility over budgetary
functions.
We've also heard from experts like David Walker, the
Comptroller General of the United States, and the Pentagon's
own Inspector General, both of whom highlighted the billions
and billions of dollars that are wasted every year as a result
of these broken systems.
What I did not expect as a result of our quest was to be
surprised again by the severity and the starkness of the
Pentagon's inability to be able to understand exactly how their
own systems work and to be able to account for the very
materiel which the taxpayers of the United States pay for.
As you know, the GAO chose one item, a suit worn by service
members to protect themselves in the event of a chemical or a
biological attack. Obviously in light of the anthrax attacks
and our military's deployment to all parts of the world, these
suits are extremely sought-after. The department is spending
over $1 billion to buy these suits at $200 apiece. The Pentagon
plans to buy 4.4 million of these suits, but to date they've
issued only about a quarter of these. According to the official
in charge of this program, service members have been clamoring
for these suits. Now, despite this intense demand, GAO found
that the Pentagon was basically giving them away. They were
selling them on the Internet for $3 apiece. That is nearly a 99
percent discount from their actual cost to the U.S. taxpayers.
Now, I want to read that again so, you know, in case
anybody missed it, the department spends $1 billion to buy
these suits at $200 apiece, plans to buy 4.4 million of the
suits. GAO finds the Pentagon is selling them on the Internet
for $3 apiece.
Now, the GAO found that some of the military units kept
absolutely no records on the number of suits they had. Others
used dry-erase boards to maintain their tally. When told of
these abuses, the program manager said he had no idea that
these resales were occurring. He conceded at this point that he
had no visibility over his inventory.
These problems would be very different if they were being
aired for the first time, but they are not excusable, given
that this subcommittee held a hearing 2 years ago on exactly
this issue.
This is how GAO put it, ``In essence, DOD is faced with the
same predicament today as it had in June 2000 when hearings by
this subcommittee chronicled DOD's inability to identify the
location of these protective suits.''
In our hearing 2 years ago, we were concerned about the
Pentagon's control of these suits for a slightly different
reason. The suits were defective. They needed to be recalled
and removed from the inventory. But to this day, the Pentagon
has not been able to locate about 250,000 of these defective
suits. The Pentagon doesn't know if they were used, whether
they were thrown away, or whether they are still somewhere in
the stocks, defective suits waiting to be used by unsuspecting
service members.
For that matter, the Pentagon doesn't know whether any of
these suits were sold over the Internet, either.
Of course, we asked the GAO to examine only one relatively
inexpensive item, but the dysfunctional systems governing this
item are the same systems governing all of the Pentagon's
purchases, budgets and inventories. As the GAO concluded in its
report, ``these shortcomings are consistent with the long-term
problems in the DOD's inventory management that we've
identified as a high-risk area due to a variety of problems,
including ineffective and wasteful management systems and
procedures.''
Mr. Chairman, we're just scratching the surface of a
mammoth problem here today. If we're losing millions of dollars
on a small procurement item like the protective suits, imagine
how many billions of taxpayer dollars are being wasted on
procurement problems associated with our expensive jets,
bombers, tanks and ships. This subcommittee isn't able to work
on everything. Since we have to choose, we should focus on the
items that waste the most taxpayers' dollars. This is a good
example today.
As we heard in our previous hearings on this topic, the
department has set out a 10-year plan to address their
financial management deficiencies. This time line is much, much
too long for American taxpayers to continue sending in their
hard-earned money, just to have the Pentagon throw it away.
And finally, Mr. Chairman, the thing that becomes
compelling here, since this country is contemplating possible
military action against a country which is said to have
biological and chemical weapons, and since you would think
under those circumstances our troops would then be given the
kind of materiel which in some cases is considered to be
defective, we have a matter here that has to be looked at to
protect the men and women who serve this country.
I thank the Chair very much for giving me this opportunity.
Mr. Shays. I thank the gentleman for requesting this
opportunity.
We would now call on Ron Lewis.
Mr. Lewis. Nothing.
Mr. Shays. Thank you. Thank you for being here. Mr. Lewis
has been a very active and valued member of this committee.
And I'll also call on another very active Member. Ms.
Schakowsky, if you have any comments you'd like to make
before----
Ms. Schakowsky. Yes, I would.
Mr. Shays. Take your time.
Ms. Schakowsky. Thank you, Mr. Chairman, and Ranking Member
Kucinich, for your vigilance on this issue. The Government
Affairs--the Government Efficiency Subcommittee, which is
chaired by Steve Horn and on which I am the ranking Democrat,
has also been looking into the issue of the Department of
Defense and its handling of financial matters. The financial
abuses that have occurred at the Pentagon and the DOD's lack of
initiative and willingness to change its financial management
practices is an ongoing problem. Despite the fact that the
Defense Department is responsible for half of the total
discretionary spending of the Federal Government, nearly $400
billion, the DOD is slow to implement changes in many areas of
its operations to better account for taxpayer money.
In 1995 the GAO put the Defense Department's financial
management on the high risk list. One of the issues stated by
the GAO then was the failure of the department to protect its
assets from fraud, waste and abuse. Since then we found that
millions of dollars in personal items, trips, and even plastic
surgery were charged to government-issued credit cards. In the
GAO report on DOD financial management, the GAO tracked the
DOD's purchase of joint lightweight integrated suit
technology--I guess that is--is it the JSLIST? Is that what you
say? Am I right? JSLIST. OK. And a computer hardware item that
it purchased from a local vendor with a DOD purchase card. The
Pentagon contract for JSLIST, a two-piece lightweight garment,
I guess we've got it here, to protect against chemical and
biological agents, calls for the production of 4.4 million
suits over 14 years, for a total of $1 billion. The GAO found
that antiquated systems, manual procurement processes and
inventory control and payment is plagued by flaws and
weaknesses that cost the DOD millions. GAO found that because
of these problems, suits determined to be in excess--we have
long since known about the problems with the DOD purchase card
system. The DOD still manually enters purchases made with
purchase cards instead of electronic transmissions. Inefficient
billing procedures and use of nonintegrated data systems result
in costly processing.
In example after example, purchase cards supplied at
taxpayers' expense to workers who use them to, among other
things, purchase items such as clothing and Legos. GAO stated
that purchase cards will account for nearly $20 billion in
purchases in this fiscal year or the next. If there is 5
percent waste in these purchases, that is $1 billion of waste
that we have to eliminate.
The GAO has provided the Pentagon with the foundation on
which to build. DOD must make every effort to improve upon
these recommendations so that we can ensure that the American
taxpayers' hard-earned money is spent defending our country and
not paying for golf memberships.
The reasons behind these management problems are--come in
several areas, problems with financial and contract management
result from inaccurate financial reports and contract
overpayment. In fact, for fiscal years 1994 and 1999, over $1.2
billion of overpayments to contractors have been returned to
the DOD.
We've also found that DOD's management inventory is flawed.
DOD continually stores huge amounts of materiel and equipment
that has no use. Additionally, the DOD process for tracking
acquisitions and purchases is antiquated and seriously flawed.
Oftentimes DOD cannot find records of procurement, accounting,
control and payment.
Actually, Mr. Chairman, what this statement sounds like to
my own ears is deja vu all over again. I have basically read
this opening statement time after time after time. I've only
been here a short time, and yet the improvements or lack of are
quite astonishing, and here we go again.
Last July we were told that the purchase card issue would
be addressed. Instead we got business as usual, fraud, waste
and abuse. I do not expect the same today. I hope that the DOD
will begin to take the recommendations of the GAO seriously and
use the advice to design and implement programs that will
improve the DOD's financial management situation.
I thank all the witnesses for their work, and I look
forward to hearing how our guests from the DOD plan to make use
of the information they receive from the GAO at this hearing
and how they plan to clean up the Pentagon's financial mess.
Thank you.
Mr. Shays. Thank you, Ms. Schakowsky.
Mr. Tierney, welcome.
Mr. Tierney. Thank you, Mr. Chairman. I'm going to waive my
opening statement, because I'd really like to get to the
witnesses. I think the hearing is worthwhile, and it will be
interesting to pursue the matter.
Mr. Shays. We'll get right to it. I'm just going to preface
my comments by saying that I go back a little beyond Ms.
Schakowsky, and I remember we had this problem in the Reagan
administration, the Bush administration, the Clinton
administration, and now we have it in the Bush administration.
And I realize that this has been long-standing, and I think
part of the reason why it doesn't happen is that you're not put
out of business. We need Defense. So we keep operating. But if
we knew that we couldn't function unless we got our act
together, I think it would happen more quickly.
Mr. Gilman, I'm delighted to recognize you. I want you to
relax a second. You just sat down, but if you have an opening
statement----
Mr. Gilman. Yes, I do, Mr. Chairman. I welcome that
opportunity.
Mr. Shays. OK. Take a good breath and then read your
statement.
Mr. Gilman. OK. I'm breathing deeply.
Mr. Chairman, I want to thank you for convening today's
hearing to examine the status of the Department of Defense
financial management system, in particular how it relates to a
key item that depends with regard--that is with regard to how
we defend against biological and chemical agents. The Defense
Department has been the recipient of large increases to its
procurement and operations budget in the wake of the events of
September 11th and the subsequent pursuit of our war on
terrorism.
Given the nature of the fight that we're finding ourselves
in, these increases have been entirely appropriate. However,
the existence of an ongoing war against terrorists does not
absolve Congress of its oversight responsibilities in matters
of defense. Rather, recent events mandate greater oversight
responsibility from Congress to make certain that taxpayer
funds are going to be expended in a wise and expeditious
manner.
Given the current military environment in which we find
ourselves, it is prudent and appropriate that we work to ensure
that the Department of Defense is getting the best value for
the money it spends on the new equipment.
This subcommittee held a hearing in March of this year that
examined charges from the General Accounting Office that DOD's
financial management and procurement process were highly
vulnerable to waste, to fraud, and to abuse. Historically
whenever the government has sharply increased a department's
budget within a short period of time, waste and fraudulent
practices and inefficiency invariably follow.
Stories of widespread problems during the major defense
buildup in the early 1980's are familiar to all of us. So I
look forward, Mr. Chairman, to the testimony from our witnesses
today. We're particularly interested to hear from our GAO
witnesses to see if any improvements have been made since their
initial findings discussed at our March 2001 hearing.
Given the nature of the open-ended conflict in which we now
find ourselves involved, it makes sense for Congress to require
that the financial management system used by the Pentagon be as
streamlined and as efficient as possible.
Once again, we thank you, Mr. Chairman, for convening
today's hearing and for pursuing these issues that are
extremely important. Thank you, Mr. Chairman.
Mr. Shays. Thank you. Per Mr. Tierney's request, we're
going to get to our witnesses but first 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 unanimous consent that all witnesses be
permitted to include their written statement in the record.
Without objection, so ordered.
I will announce our witnesses. We have Mr. Gregory Kutz,
Director, Financial Management and Assurance Team, GAO;
accompanied by David Warren, Director, Defense Capabilities and
Management Team; Mr. Darby W. Smith, Assistant Director,
Financial Management and Assurance Team; and Mr. John Ryan,
Office of Special Investigation. All three are with the GAO.
We also--we're going to swear in Mr. John Coyle. He's on a
plane. He's the Department of Business Logistics, Pennsylvania
State University, and probably may have to put him with the
second panel. We'll see. And if he gets here on time, maybe
I'll swear him in and we'll keep him with the first.
So if you gentlemen would stand, I will swear you in. If
there's anyone else that might respond to questions, if you'd
just allow us to swear you in as well.
[Witnesses sworn.]
Mr. Shays. I'll note for the record that all of our
witnesses have responded in the affirmative. And so we have one
statement by Mr. Kutz and then we'll go to questions if Dr.
Coyle isn't here yet. Welcome.
STATEMENTS OF GREGORY KUTZ, DIRECTOR, FINANCIAL MANAGEMENT AND
ASSURANCE TEAM, U.S. GENERAL ACCOUNTING OFFICE, ACCOMPANIED BY
DAVID WARREN, DIRECTOR, DEFENSE CAPABILITIES AND MANAGEMENT
TEAM; DARBY W. SMITH, ASSISTANT DIRECTOR, FINANCIAL MANAGEMENT
AND ASSURANCE TEAM; AND JOHN RYAN, OFFICE OF SPECIAL
INVESTIGATION
Mr. Kutz. Mr. Chairman and members of the subcommittee,
it's a pleasure to be here to discuss the need for business
process reform at the Department of Defense. In our June 4th
testimony before this subcommittee, we identified seven key
elements necessary for a successful reform. Today I will move
from a high-level discussion of reform to case studies
demonstrating DOD's current management challenges.
At your request, we used the following two case studies.
First, the inventory process for the JSLIST, chemical and
biological protective suits, which I'll refer to as chem/bio
suits, and second, the purchase of a computer using the
government purchase card.
For the two case studies, our objectives were to evaluate
the efficiency and the effectiveness of DOD's business
processes and to compare certain aspects of DOD's processes to
those of two large leading-edge retail companies, Wal-Mart and
Sears.
The bottom line of my testimony is that both case studies
clearly demonstrate that DOD's business processes are both
costly and ineffective. Most significantly, we found that DOD
was selling needed chem/bio suits to the public while at the
same time buying more.
For the first case study, we found that the chem/bio suit
inventory process was characterized by stovepiped,
nonintegrated systems with numerous costly, error-prone, manual
processes. Of the 128 processing steps that we identified, 100,
or about 78 percent, were manual. These manual processes were
used to enter and reenter data into the 13 data systems that
supported the chem/bio suits. Manual processes include mailing
key data, sending e-mails and faxes, and inputting data from
hard copy documents into the systems.
As you can imagine, compared to fully automated processes,
the cost of manual entry of data and reentry is substantial.
One reason for the numerous systems that are unable to
communicate with each other is the parochial nature of DOD's
system modernization efforts. As you may recall, as of your
June 4th hearing, and as you showed earlier from the computer
system environment that they have today, DOD has identified
1,127 systems that process financial information. This
proliferation of systems has happened because modernization
money is spread throughout DOD with everybody, particularly the
military services, building their own systems.
With respect to effectiveness, we found that the inventory
management process resulted in a lack of asset visibility over
the chem/bio suits. Asset visibility means the ability to
readily identify the location and key information about the
suits at all levels of the department.
The most severe asset visibility problem relates to the 1.2
million suits that have been sent to units of the military
services. For the military units that we visited, the methods
used to control and maintain visibility over suits range from
automated systems to spreadsheet applications, to pen and
paper, to dry-erase boards with handwritten notes, to none.
The data maintained at the units also varied. Some units
maintain specific data such as the manufactured date and
production lot number, while other units contain little or no
data in their systems.
In essence, as you mentioned, Mr. Chairman, DOD is faced
with the same visibility problems today as it had in June 2000
when hearings by this subcommittee chronicled DOD's inability
to identify the location of defective battle dress overgarments
which are the JSLIST predecessor. We later reported that as of
April 2001, DOD had not found about 250,000 of the defective
BDO suits.
Today, lack of visibility has contributed to DOD excessing
packaged unused JSLIST chem/bio suits and selling them to the
public or scrapping them. At the same time, DOD is buying
hundreds of thousands of new suits annually. We identified
1,934 chem/bio coats and trousers valued at over $200,000 that
were excessed primarily after September 11th by Navy, Army and
Air Force units. Of these, 429 were sold and 917 were
destroyed. The 429 coats and trousers, which had a reported
cost of $107 each, were sold by Internet auction for about $3
each.
I have in my hand one of the coats that was excessed and
being sold on the Internet in Hawaii. This coat is vacuum
sealed and appears to be in good condition. We have another
suit here from the same lot that is marked ``training only.''
We found that DOD needs all of the chem/bio suits that were
being excessed and sold.
Last Wednesday we informed the JSLIST program manager of
this situation. He was not aware that the chem/bio suits were
being excessed and sold, and agreed to immediately terminate
the sale of these suits.
The inventory management practices we identified and
observed at Wal-Mart and Sears differ sharply from those at
DOD. For example, for both companies, we found standardization
of data, little or no manual processing, and systems that
provide a complete asset visibility. Unlike DOD, Wal-Mart
requires all components and subsidiaries to operate within its
system framework and does not allow stovepipe systems
development. For both Sears and Wal-Mart, data moved through
their automated systems from the supplier to the distribution
centers, to the retail stores.
As shown on the poster board, we found that Wal-Mart and
Sears had visibility over inventory at the corporate
distribution center and retail store levels. In contrast, as
previously discussed, DOD did not have visibility at the DOD
military service over unit levels. We found that integrated or
interfaced systems and standardized data allowed both Sears and
Wal-Mart to specifically identify inventory items.
For example, based on our inquiry, Wal-Mart headquarters
staff was able to readily identify the number of 6.4 ounce
tubes of a brand name toothpaste that were at their Fairfax,
Virginia retail store. Other information was also available,
such as daily sales volume.
With regard to our second case study, we found that the
purchase card process was somewhat automated and provided the
flexibility to acquire goods and services on the day that they
are needed. However, we found for certain transactions
processed through DFAS Columbus, monthly credit card statements
are received by mail or by fax. For these statements, personnel
manually reenter each line of the purchase card statement. This
manual entry of data is required, because DFAS does not have
the ability to accept the data electronically.
As shown on the poster board from the Navy monthly purchase
card statement with 228 transactions, as you can see, there was
a $17 processing fee per line that is well in excess of several
of the items that were purchased on that monthly statement.
DFAS charged the Navy over $3,900 to process this monthly
credit card bill.
In contrast, both Wal-Mart and Sears make extensive use of
electronic data transmission within their internal systems and
with all of their suppliers.
In summary, the chem/bio suit and purchase card case
studies clearly demonstrate the high cost of the current DOD
business processes. In addition, mission performance is also
affected, as shown by DOD's lack of visibility over the chem/
bio suits. These case studies are small examples of the broader
financial and inventory management and systems modernization
challenges facing DOD. The automated processes used by Wal-Mart
and Sears offer a glimpse at the cost savings and improved
mission performance that DOD could achieve through successful
reform. Unlike DOD, market forces and a strong system of
accountability drive Wal-Mart and Sears to operate as
efficiently and effectively as possible.
We believe that for DOD to succeed in its reform efforts,
strong leadership from the Secretary will be necessary to
develop a system of accountability and incentives and to cut
through the deeply embedded cultural resistance to change. The
Secretary has recognized the importance of reform and estimated
that DOD could save 5 percent of its budget, or about $15 to
$18 billion annually, through successful reform efforts.
Mr. Chairman, this concludes my statement. With me are Dave
Warren, John Ryan and Darby Smith. We'd be happy to answer any
questions.
[The prepared statement of Mr. Kutz follows:]
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Mr. Shays. I'm going to call on Mr. Gilman, but before I
do, I told Mr. Kucinich I have one question that is just very--
of real interest to the entire committee. Basically because of
our investigation and the work you all are doing, we're able to
stop the public sale of the JSLIST suits. Do you know who was
trying to buy them?
Mr. Ryan. Yes, we do.
Mr. Shays. Put your mic on, please.
Mr. Ryan. Yes, we do. We identified the individuals. We've
passed the information on to DLA investigators, and we also
sent it to the Joint Terrorism Task Force in Honolulu for
further investigation.
Mr. Shays. So you believe that these weren't just every-day
Americans looking to protect themselves, but you believe that
some of these suits may in fact have been attempted purchased
by those who have evil designs on our country?
Mr. Ryan. I think it's too early to say. At this point I
think we have to continue the investigation. We have to gather
all the facts, let the Joint Terrorism Task Force do the
appropriate followup. We can report back to the committee with
the findings.
Mr. Shays. Do you have concern that they may be?
Mr. Ryan. I always have concerns. I have concerns that any
time that we've given protective equipment to our soldiers and
then we put it on public auction that someone can get ahold of
it. I have concerns about reverse-engineering these suits. But
once we looked into it and we found that you could buy them on
the Internet through a public auction and not necessarily
provide specific information about yourself, yes, I am
concerned about that.
Mr. Shays. So----
Mr. Kutz. Mr. Chairman, the technology for these suits is
used around the world. There are 17 countries that have this
type of chem/bio suit. So this is not technology that is unique
to the Federal Government of the United States.
Mr. Shays. Yes. But bottom line is, there's concern that it
may have been bought by the wrong people. Fair enough.
Mr. Gilman, you have the floor.
Mr. Gilman. Thank you, Mr. Chairman. I address this to our
panelists. Why can't DOD track and account for the JSLIST on a
department-wide basis?
Mr. Kutz. I think it's a combination--if you look at any of
the issues with DOD with financial or inventory management,
you've got people, processes and systems, including the
information technology. What we've found here was that the lack
of the integrated or interfaced systems, it broke down along
the way so that the information was not tracked. The
information was sent from the warehouses at DLA down to the
units. At that point the warehouses no longer track the
information. When the information got down to the units, you
had inconsistent ways that they were being tracked or, in some
cases, they weren't being tracked at all, and when we looked at
Wal-Mart and Sears, what we found was from the corporation down
to their distribution centers down to the retail stores, you
had completely integrated or interfaced systems.
So, for example, when I mentioned the toothpaste before,
they were always able to go in--that happened in a matter of
minutes they were able to go in and identify that there were 25
6.4 ounce tubes of toothpaste at the Fairfax store. So it's
integrated systems and processes.
Standardized data is the other thing. Back on the military
unit level, we found the different units were reporting
different information in the systems, and so if everybody
doesn't record the same information, it's hard to roll up
things like the expiration date or lot number, etc. And, again,
that was a common element with Wal-Mart and Sears, that they
had standardized data for each one of their inventory items
that could roll up and be throughout all their systems.
Mr. Gilman. So is this going to be corrected now? Is anyone
working on correcting this failure?
Mr. Kutz. We have recommended in the past to the department
to implement an integrated inventory management system, and
certainly that is something that they have attempted to do
before and are currently attempting to do now. There are
certainly challenges with that. Again, similar to what we
talked about with the proliferation of systems, where they need
to have an architecture to see how all of these different
systems development efforts fit into that so that at the end of
the day we know what we're building today is going to fit into
the architecture of tomorrow.
Mr. Gilman. These suits are a relatively benign item. Does
DOD have similar tracking problems with weapons and ammunition?
Mr. Warren. Yes, they do.
Mr. Gilman. Would you identify----
Mr. Warren. Dave Warren. We've noticed in transit items
with disposal items, items going into disposal, items being
transferred from one Navy base to another, items being
transferred from one Army base to another, and what happens is
accountability for those items is lost, and most of those
problems as we go in and look why does that happen, it's very
similar to what you're seeing here today. It's either
recordkeeping problems and/or systems that are not talking
effectively to one another and not working in an integrated
fashion. So this system, or a particular example we have today
is, in essence, a systemic problem in terms of the control of
inventory across the Department of Defense, and that is one of
the reasons that we have identified inventory management as a
high risk area since 1990 within DOD.
Mr. Gilman. Well, David, is this all being corrected now?
Mr. Warren. The short answer is no. It has not been
corrected. There have been a number of initiatives and
recognition of this problem over a 10- to 12-year period, I
would say. The difficulty has been that there have been many
fits and starts, so to speak, to get at this, but there has not
been a continuity of effort that----
Mr. Gilman. What is it going to need to get this corrected?
Mr. Warren. A continuity of effort, a single focal point
with responsibility and accountability for achieving even this
broader--you mentioned Mr. Walker's testimony. What he proposed
there is that there needs to be an overall business process
transformation effort that includes the incorporation of not
only financial, procurement, logistic systems that is placed in
one central, focal point that understands the entire lay-down
and architecture that is going to occur, they are accountable
for making that happen, and that can be driven through the
department.
This committee, for example, then could call that person up
and say, this is where we were yesterday, where are we now----
Mr. Gilman. Let me interrupt. Is DOD undertaking such an
effort now?
Mr. Warren. They have some portions of that. I would let
Greg speak to the financial portion which is kind of the
centerpiece of that which we----
Mr. Shays. Let me do this. I'm going to have the Members do
5 minutes the first round, and we're going to do 10 the second.
I always prefer the 10, but one or two Members may need to get
on their way. So I just want to do that. We'll defer that part.
Remember to make sure it's----
Mr. Gilman. Thank you, Mr. Chairman.
Mr. Shays. Mr. Kucinich, and then we'll go the second round
10 minutes.
Mr. Kucinich. I want to thank all of the gentlemen who have
worked on this, and your staffs as well.
Mr. Kutz, I'm going to ask some questions and, you know,
try to move along through this.
Has there ever been a complete recall of the defective
suits that were identified 2 years ago?
Mr. Kutz. I believe they attempted to recall them, but I
don't believe that they were ultimately successful in
identifying all of the suits.
Mr. Kucinich. Why?
Mr. Kutz. Because of the system we just talked about here.
Mr. Kucinich. Let me ask you this now. Could you estimate
how many defective suits are out there right now?
Mr. Warren. The latest estimate was at 250,000 that were
unidentified.
Mr. Kucinich. So I want to get this straight. The
administration has been talking about an invasion of Iraq,
which is known to have biological and chemical weapons, some of
which they use against their own people, and we have 250,000
defective suits that would otherwise protect our men and women
who we're going to ask to go into battle, and they are not
going to know if those suits would provide them protection or
not? Isn't it possible that since these suits are defective
that any men and women who would be wearing them in a combat
situation under biological and chemical weapon attack could be
in risk of their lives?
Mr. Kutz. If they did get those, they would be. These are
the old suits now. So they should not be necessarily used on
the battlefield, but it is possible that they are out there and
could be used.
Mr. Kucinich. You know, I think all of us remember the
situation in Vietnam years ago where people were given
automatic weapons. Their weapons didn't work, and men and women
died in battle. I mean, this is a--this is a very serious
matter, because it relates to protecting those we ask to serve
this country, and you're saying that even though 2 years ago
this was brought up, they haven't straightened it out, that
these suits are still out there. And furthermore, we're now
finding that other suits, maybe the ones that are not
defective, are being sold on the Internet that cost the
taxpayers $200 each, and they are being sold on the Internet
for $3 each, and we really don't know who is buying them. You
say that you referred it to the terror task force. Is that
right?
Mr. Ryan. Yes, we have.
Mr. Kucinich. Whoever it was, you felt that there was
enough information, Mr. Ryan, to refer it to the terror task
force, because these people may not have had the best
intentions?
Mr. Ryan. I think at this stage of the game what we decided
to do was, based on the information that we were able to
determine on the bidder of those items. I might add also that
these items were never released to these people, because GAO
stepped in, along with the program people, and we stopped the
pickup of these items. But based on the bidding information
that we saw and the lack of background information, yes, we
truly believe that these needed to be referred and they needed
to be checked out.
Mr. Kucinich. When were these being auctioned? How recently
were they being auctioned?
Mr. Ryan. Just 2 weeks ago.
Mr. Kucinich. Whoa. Is it possible also, in addition to
those that might not have the best intentions for the use of
this equipment, that people who might represent individuals who
want to sell them back to the government at 200 bucks a piece
may be buying them? I mean, think about it. Is that possible?
Mr. Ryan. We had some concern about that. Preliminarily we
looked at that in regards to selling them back.
Mr. Kucinich. Would the government buy--let me ask you
this. I mean, if the government needed them, would the
government buy them back? Anyone?
Mr. Warren. I know there have been instances where that has
occurred with other types of inventory items.
Mr. Kucinich. So that the government--the taxpayers could
pay $200 for a suit, it be sold at $3 on the Internet, suddenly
they discovered it was needed again and they may pay $200 again
for the same suit? That is possible?
Mr. Warren. It is possible, yes, sir.
Mr. Kucinich. Who sells these suits? You know, once
somebody makes a determination they are sold, who is it that
actually sells it? Is it a military unit? Is it the Department
of Defense? Is there, like, a bureau of auctions in the
Department of Defense?
Mr. Warren. The defense disposal system handles that, and
that's part of the Defense Logistics Agency, and they have a
marketing service, in essence, that handles that. In this
particular interest--instance, they had contracted the end
point of sale out--had been outsourced as a function, but it is
DOD's responsibility which was delegated from GSA under this
Disposal Act of 1949 to handle the disposal of all items within
the Department of Defense.
Mr. Kucinich. One other question, and my time is expired on
this round. What kind of auction do they have? I mean, is this
at Sotheby's? Or where do they auction these protective suits?
EBay? You know, hello, whatever. Where do they auction these
things?
Mr. Ryan. The auction basically takes place over the
Internet. You go online, you register. There's a minimum bid.
In this particular case the minimum bid was $35 for the lot.
And you bid until you win.
Mr. Kucinich. How many in a lot?
Mr. Ryan. I don't know how many were in this particular
lot. We participated, and that was the price.
Mr. Kutz. We did attempt to buy one of the lots.
Mr. Ryan. We bid on the--when it came up for sale, with the
permission of the committee, we attempted to purchase, and we
lost out on the bid at the final end.
Mr. Kutz. We drove the price up to $3.
Mr. Kucinich. You drove the price up?
Mr. Ryan. We had an automatic--we were bidding against an
automatic system, that every time we bid, they bid higher.
Mr. Kutz. Some of the earlier lots had sold for less than
$3 apiece.
Mr. Kucinich. Well, gee, thank you for saving the
government that extra money.
Mr. Shays. Let me do this. We have Mr. Coyle. Come on in.
Dr. Coyle. I'm sorry. I'm going to have you sit in that chair
there. You're probably saying who am I and where am I going. I
understand you just got off a plane. And I'm going to ask you
to stay standing, because I'm going to ask you to put your
books down. I'm going to swear you in. And then we'll proceed
from there. If you'd raise your right hand, Mr. Coyle.
[Witness sworn.]
Mr. Shays. Thank you. Mr. Coyle, please be seated. You're
going to get a chance to catch your breath a second. I'm going
to go through with Mr. Lewis and Ms. Schakowsky. They're going
to ask some questions, so you can get a little oriented. Then
I'm going to have you give your statement before GAO leaves and
then we'll do 10 minutes of questioning with each.
Mr. Lewis, you have the floor. I keep saying Mister. You
are a doctor, and you have earned that. I apologize. Dr. Coyle.
Mr. Lewis. Thank you, Mr. Chairman. Do you have any
specific recommendations for fixing this problem, and if you
do, how quickly could this be put in place to turn this around?
Mr. Kutz. From a narrow perspective, we've recommended they
implement integrated inventory management systems, and with
respect to these specific items, our previous recommendation
was to standardize the data. And that was really based on the
inability to recall--to do a proper recall, certain information
has to be in the system in a standardized basis to locate where
it is. And that is one of the things--we talked to Wal-Mart,
for example. You may recall the Tylenol recall with Johnson &
Johnson back maybe 10 years ago or so. That is one of the
important pieces of information that they had in their system.
Because of customer service, they believe it's imperative that
they're able to go back and immediately recall any defective
products from their shelves.
Mr. Lewis. So it could be as simple as DOD taking some
lessons from Wal-Mart or Sears, then?
Mr. Kutz. I wouldn't say it would be simple, but it would
be something that is achievable. Certainly supply chain
management at the Department of Defense is possible here.
Inventory systems that would be either integrated or interfaced
should be possible, yes.
Mr. Lewis. Thank you. That is all I needed to know.
Mr. Shays. Thank you, Mr. Lewis.
Ms. Schakowsky.
Ms. Schakowsky. Thank you, Mr. Chairman. Mr. Kutz, I'd like
to say it's nice to see you again, but it seems like you're
always here and I'm always here and we're talking about
financial mismanagement that is never ending, it seems,
anywhere you look in the Department of Defense.
Two years ago the same thing was brought up. What, in
your--to your knowledge has been done in the last 2 years, if
anything, to address this problem?
Mr. Kutz. They have a longer term systems development
effort that we're aware of called the BSM, business system
modernization, I believe, but that is not scheduled to be
completed for several more years.
With respect to shorter term initiatives, the Air Force has
implemented--if you look at the poster board up there, the Air
Force has a system that they use that is standardized across
the Air Force that does have all the information, each of the
units in it, including manufacture, date lot number, etc. And
based on our work we've seen that they have talked about
sharing that with the Army and the Navy, so there is some hope
for that. But the bigger systems development effort they have
is still years away, and by the time all of these new suits are
deployed, the system will probably come online at or near the
end of that period, which means you'd have to do a complete
physical inventory to get them into the new system.
Ms. Schakowsky. Are we paying too much to start with? If
it's sold at auction for $3 and we're paying 200 to start, is
that too much money?
Mr. Kutz. For the cost of the actual new suits? We didn't
look at that. The old battle dress overgarments, I believe,
cost about $80, and this is a new and improved technology. So
$200 or $207 for the coat and the trousers, we didn't evaluate
whether that was a good price or not, if that is your question.
Ms. Schakowsky. That is my question. When you compare it
to--you said you boosted the price to $3 a suit on the
Internet. It makes me wonder if we weren't suckers to begin
with by paying $200 a suit. But as you say, that isn't even
part of the inquiry. That is a whole other question, whether
we're overpaying.
I can't help but stress how this lack of accountability in
the Department of Defense, which seems to be sloughed over in
every budget cycle, it's so frustrating to me. If it were the
Department of Education or Housing and Urban Development, I'm
sure we'd have all of these investigations, and we'd
practically shut it down and things would be defunded, and yet
here we are with a $48 billion increase in the defense budget
with these ongoing problems.
Let me ask you this. Do any of you have any doubt
whatsoever that these two inquiries are only a small example of
what is happening on a much wider scale throughout the
Department of Defense?
Mr. Kutz. What we would believe, and others can add on,
that this would be indicative of other broader problems. As was
mentioned earlier, the total purchase amount for the JSLIST at
the end of the day will be about $1 billion. Right now,
according to DOD's records, which, you know, cannot pass the
financial audit standards right now, there is about $200
billion of items that are in the various inventories at DOD. So
you can see that this is a very, very small example of what is
a broader issue. So we would say that this could be indicative
of various other things.
Mr. Warren has seen a lot of other examples of the
inventory----
Ms. Schakowsky. Let me just underscore what you said, that
they cannot pass an audit.
Mr. Kutz. Right. I think what we're talking about today
would give you some idea of why with respect to the financial
information that would be necessary to pull this into a set of
financial statements just for this one item.
Ms. Schakowsky. And let me also get in the record other
findings that you have mentioned, that have been mentioned,
that $1.2 trillion in transactions cannot be accurately
accounted for through the Department of Defense. Is that not
true?
Mr. Kutz. That's based on an inspector general report,
correct.
Ms. Schakowsky. Mr. Warren, did you want to further
comment?
Mr. Warren. It is really a business process transformation
problem. Again, the systems and the business processes within
the Department of Defense largely we developed as it relates
into the logistics area in the 1960's and 1970's, and at that
time they were quite good systems and based on modern business
and practice at that time.
However, over time they have evolved and have not
modernized. So what you're faced with is what is often referred
to as a brute force system. It gets the job done, but in many
respects, it's very inefficient. The department is struggling
at this point and really has over the last 6 to 7 years to come
up with a transformation process to bring their logistics
systems into a modern supply chain-oriented logistics process.
But the progress has been very slow, and they're not there yet.
And so as a consequence, you continue to see many of these
inefficiencies, overbuying, in order to ensure that you have
what you need when you need it so----
Ms. Schakowsky. I would agree with everything you said
except that they get the job done because ultimately when the
taxpayer overpays and defective suits are out in the field, as
Mr. Kucinich pointed out, this is not really getting the job
done.
Thank you, Mr. Chairman.
Mr. Shays. Thank you. Mr. Coyle, before having your
testimony, I'm just going to ask a few questions of our
witnesses here.
Now, we've had a number of hearings over a number of years
and we have looked at just the poor inventory control in
general, and now we have a very specific kind of case. What's
on the record now is that in some cases we had a surplus, in
some cases we didn't, as perceived by military personnel in
different parts of the world, frankly. And so in some cases,
not in some cases, we're purchasing more of these suits but yet
we were selling some. That's correct, right? And there is a
concern that some of the people who may have been buying them
may in fact have bad intentions on the United States to be
further looked at. But in other words, there's enough of a
concern that the GAO made referrals to proper legal
authorities, correct?
Mr. Ryan. That's correct.
Mr. Shays. Now, then there's also the old suits of which we
think 250,000 are defective. Do we use the old suits as well?
Tell me the status of old suits. When I say old suits, I don't
mean these suits old, right? These are a different suit. Tell
me, the defective suits, are they these suits?
Mr. Smith. No, the defective suits are what they used to
call the battle dress overgarment. It's a completely different
suit than the JLIST. So the ones that we're talking about that
we could not find, or we reported they couldn't find 250,000
of, were the older suits, not the JLIST. The older suits was
the subject of the hearing 2 years ago by this subcommittee.
Mr. Shays. Right. No, I remember it because what's so
horrific about it is those suits were still being used but they
were put into the lot of good suits, so we had a mixture of
good and old, bad, and yet we didn't have any way to track
them, correct?
Mr. Smith. That's correct. The issue we have today is the
tracking is the same. They couldn't find the old suits. Today
they're not able to track the new suits. So the issue about the
tracking----
Mr. Shays. We don't even know where the new suits are, I
mean, technically. We can't say they're here, here, here, and
here.
Mr. Smith. The only ones that they actually could account
for would be the ones that are in the DLA warehouse when they
come from the manufacturer. Once they are issued out to the
individual units, then, as shown on the chart, it becomes very
difficult to be able to track and account for those suits down
to the military units.
Mr. Kutz. And as of September 30, 2001, that was 1.2
million of the new suits that had been distributed out to the
units. And we would have the concern that they would have the
very same problems with tracking those that they had with the
BDL. Again, it's because everybody is doing something
different, particularly in the Army and the Navy, where some
units that we visited weren't tracking them at all; other ones
had, you know, the dry erase board, handwritten notes, some had
pen and paper, etc. So if you really had to find out where
these things were on a moment's notice, either on a recall on
some emergency happened somewhere, these 1.2 million would be
very, very hard to find and it would be highly unlikely you
would get an accurate count of them at any point in time.
Mr. Shays. It's clear a system like this invites
extraordinary waste, of course, you've illustrated that. It's
wasteful to sell when you're already buying, and it's alarming
that you would be selling a suit that could be used for--by our
potential enemies. But it also just invites fraud, doesn't it?
Mr. Ryan. [nods in the affirmative.]
Mr. Shays. A nod of the head is hard to transcribe.
Mr. Ryan. Yes, I think it can, because they lose visibility
of it at the service units. If there's no accountability at
that point, as Mr. Kutz and Mr. Warren have pointed out, you
don't know where they're at.
Mr. Shays. So someone could literally sell a lot of it--
this is--by the way, we're focused on the suits, but this is to
illustrate the whole system. And what--we all bring to the
table different experiences, but when I was going--was in the
Peace Corps, I spent 3 months in Molokai and a wonderful family
invited me for a Christmas dinner, seven-course meal. She was
Chinese, he was Hawaiian. And I remarked about the quality of
the food, and they opened up one of these chest freezers, and
in it was U.S. Government-stamped food, meats. And at the time
I just made an assumption that they had bought them. Maybe they
bought them. They didn't buy them over the Internet. So I
probably shouldn't assume they bought them illegally, and I
didn't at the time, but it was clear to me that they shouldn't
have it.
Mr. Kutz. Mr. Chair, one thing that's happening now is the
units out in Hawaii we talked to, there's some confusion about
the manufacturer's warranty versus the useful life of the
suits. The people that excess these were, it appeared, under
the mistaken impression that once 5 years is up with the
manufacturer's warranty, that the suits are no longer good.
That is not correct. We understand these have been designed to
last at least 14 years.
So given the first group of these that was manufactured was
in 1997, these are starting to reach their 5-year warranty.
There is a risk unless the Department gets the word out that
other people will have boxes of these in a corner, that aren't
in any records, that will look at the manufacturer's warranty
and say 5 years are up, it's time to excess these. That appears
to be in this part with the Hickam Air Force Base and the Naval
Ordnance Disposal Unit in Hawaii that excessed some of the
suits that we have here at the table.
Mr. Shays. OK, let me do this. Let me call on you, Dr.
Coyle, to make your statement, and then we'll go 10-minute
rounds and we'll ask Mr. Kucinich to start us off.
STATEMENT OF JOHN J. COYLE, DEPARTMENT OF BUSINESS LOGISTICS,
PENNSYLVANIA STATE UNIVERSITY
Mr. Coyle. Good morning, Mr. Chairman.
Mr. Shays. Is your mic on?
Mr. Coyle. Good morning, Mr. Chairman and members of the
committee.
Mr. Shays. I'm sorry, I was going to just--given that you
walked in kind of looking like you didn't know who you were and
where you were, I want to set the record here. You are
Professor Emeritus and the Business Administration Director of
Corporate Relations for the Center for Supply Chain Research,
and you have written over 100 publications in the area of
transportation and logistics, presented papers on these same
topics at professional meetings, including the Council of
Logistic Management, the American Marketing Association, and
National Academy of Sciences. And you're a coauthor of two
best-selling books, the Management of Business Logistics and
Transportation, and you edited the Journal of Business
Logistics from 1990 to 1996, and you're on the editorial review
board of the Journal of Business Logistics of Supply Chain
Review and the International Journal of Physical Distribution
Logistics. You are highly qualified to come before this
committee. It's an honor to have you, and the floor is yours.
Mr. Coyle. Thank you very much for that kind introduction.
Good morning again to you, Mr. Chairman, and to members of the
committee. I apologize for being late this morning. I sat on
the tarmac in State College, Pennsylvania this morning for
about 2 hours in a ground fog, so we were obviously late.
Mr. Shays. We're going to have some votes. You have 5
minutes--let me see we have one vote or two. We have--it's a
recess. We're cool. Go for it. I've interrupted you twice.
Three times, and I'll give up the chair.
Mr. Coyle. No problem. And I also apologize because I did
not hear the earlier testimony, and I don't know whether my
comments will be somewhat redundant with the other testifiers.
So let me just be very brief and then you can ask me questions.
As you all well know, the landscape for business
organizations changed dramatically during the 1990's. We feel
in our Center for Supply Chain Research that was the result of
five or six major external forces, including a new and very
empowered consumer, more highly educated, better income, but
more importantly, much more information at their disposal:
Second, a tremendous amount of consolidation at the end of
the supply chain in the hands of the retailer. So as you
probably know, last year, for example, Wal-Mart became the
largest corporation in the United States in terms of sales,
exceeding not only Ford and General Motors but also Exon/Mobil.
Third, a change in government policy over a decade and a
half, with deregulation of major sectors that support business
and liberalization of trade.
Fourth, a tremendous growth in globalization and global
competitive forces impacting businesses.
And, finally, technology changed dramatically, really
changing the way businesses interacted with each other and also
changing the way they could interact theoretically with the
consumer.
Supply chain management, as my co-testifiers probably said,
arose as a strategy, if you will, or an approach, a set of
concepts to try to help organizations be more competitive
during the 1990's. As we enter into the 21st century that
continues to be the case.
This concept of supply chain management encompasses product
flow, information flow, and financials from a corporate
specter, and it's important also to recognize that it covers,
you know, extended enterprises.
Now, as we look at the supply chain in organizations, we
see a couple of key things that are happening. One is really
trying to understand demand, and aligning demand and supply are
some of the comments here, and it seems like that's one of the
problems. Creating value for the end user. Developing a supply
chain network strategy, collaborating information sharing and
redesigning your processes.
There are a lot of examples, and you probably heard of
already of successful corporations in this area that have
driven costs out of their system, and at the same time become
more effective. They are not, however, without their
challenges, particularly in the more complex types of
organizations.
While I don't have the expertise that some of my fellow
testifiers have here today with respect to the Department of
Defense, we have had the opportunity to work with a number of
DOD organizations including DLA, particularly in Columbus,
Ohio, the Defense Supply Center, and also have been actively
involved with the U.S. Marine Corps for 4 years in a series of
educational programs and some other types of research, and also
with the Army during the course of the last year and a half.
And as I look at those organizations, I have been
impressed, I must say, with the people that have I been
involved with in their trying to understand what makes business
organizations successful, in terms of their ability to
implement approaches that will allow them to take cost out of
their supply chains and also to make them more effective.
So at least at the level I've been dealing with, the
personnel are very much interested in achieving the objectives
that I'm sure you are. They obviously have a complex
organization. It's much more complex than most of the business
organizations that I've worked with over the years, and so the
complexity is a challenge. They also have, I think, some
challenges in terms of the way budgets are written for
Department of Defense groups, and then also with some of the
regulations that they have, policy they have with respect to
procurement. But that's not to say that improvement is not
possible, as I'm sure other members have suggested here today
with their testimony earlier.
It seems to me that, you know, the biggest challenge is for
horizontal and vertical exchange of information. Information is
power. Information really is the thing that allows corporations
to achieve the things that they have. And that exchange
across--horizontal exchange with the using unit and with
internal organizations and vertical interchange, is challenged,
as was suggested here earlier by somebody sitting here at the
table with me, by technology that they don't have at their
disposal and by, I think, the fact that the processes have not
been redesigned.
So, while there has been success, I really think there's a
lot more that can be done to attain the kind of things you seem
to be driving toward. And one of the key objectives of a lot of
organizations today is to achieve what they call inventory
visibility. The key to success in a company like Dell or Wal-
Mart is they do have inventory visibility. They know where the
inventory is, up and down their supply chain. While they may
from time to time lose track of an individual item, it's really
surprising how closely they control that.
So let me just stop there and try to answer any questions
you have. And again let me apologize, because I may have been
redundant.
[The prepared statement of Mr. Coyle follows:]
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Mr. Shays. Dr. Coyle, I'm going to call on Mr. Kucinich.
I'll just make this observation, though, to set the stage here.
There is basically no part of the DOD budget that is auditable,
to start with. And if it was a private business, it would be
not in compliance with the law.
Mr. Coyle. Correct.
Mr. Shays. And we all know that here. And Ms. Schakowsky
has pointed out this is not the first hearing, or the second,
or even the third hearing we've had, and others that she's been
involved in.
We also know that when you have inventory control you
prevent waste, you prevent fraud, and also you don't have to
have as much inventory because you can move it to different
places where you need it, if you know where it is.
Mr. Coyle. Correct.
Mr. Shays. But if every unit has to have a maximum--and so
one of the things I hope you will add to this is, given the
extraordinary failure of DOD over many, many, many years, over
different administrations, to get this--a handle on this, is it
possible? And Mr. Kucinich--and I think the answer is yes, but
it just strikes me that you begin to wonder.
Mr. Kucinich, you have 10 minutes. I'll go to Mr. Lewis and
then, Ms. Schakowsky, you'll have 10 minutes as well.
Mr. Kucinich. Thank you very much, Mr. Chairman.
Mr. Kutz, I want to go back to some basic numbers here.
These suits and the ones that are vacuum-packed are the ones
that are JLIST, is that right?
Mr. Kutz. Yes.
Mr. Kucinich. OK. These suits sell for $200 each.
Mr. Kutz. For a set. A coat and a trousers is a little over
$200. That's what they're buying them for.
Mr. Kucinich. According to your testimony, by the end of
fiscal year 2001, the Department of Defense had procured 1.6
million.
Mr. Kutz. That's correct.
Mr. Kucinich. Let's do the math; times $200 is $320
million.
Mr. Kutz. Correct.
Mr. Kucinich. So we're not talking about a small contract
here. This is a $320 million contract. Now, of the 1.6 million
that have been procured, how many can--how many have been sold?
How many of this JLIST lot have been sold? Do we know? On the
Internet or anywhere?
Mr. Kutz. That we're aware of--and, again, we are only
aware of the information we were able to get from the
Department--429 have been sold, although as Mr. Ryan said, they
have not been released yet. There were 1,934 that had been
excessed.
Mr. Kucinich. How do you know that?
Mr. Kutz. That's based on their records. We actually went
out to Hawaii. We sent one of our staff from Los Angeles to
Hawaii. They counted the 429. So we're certain of those. The
amount that were disposed of, the 917 that were disposed of,
that is based on their records. We would not be able to tell
you whether that's right or not. We can tell you there were 429
that were sold, and we saw most of those.
Mr. Kucinich. Of the 1.6 million that were procured, you've
only been able to focus on just a little more than 1,000. Do
you know where these are? Can you give me a categorical
breakdown on where these suits are?
Mr. Kutz. As of September 30, 2001, 400,000 would have been
in the three DLA warehouses, and the other 1.2 million would
have been distributed to the military services. And I don't
recall the data as to which service got how much. There were
preallocations of the suits. But the 1.2 million have been
distributed to the services.
Mr. Kucinich. And it's your testimony, though, that you
really don't know where they're located.
Mr. Kutz. We don't believe the Department could pull
together the visibility information as to where they're all
located, yes.
Mr. Kucinich. So is it possible that some of those could
have been sold?
Mr. Kutz. That's plausible.
Mr. Kucinich. Is it plausible that thousands of these could
have been sold, is that possible?
Mr. Kutz. Yes, that's possible. Again, there's 1.2 million
out there at the units. Again, when we went through, in some of
the examples there was human error here also. In the two
locations we visited in Hawaii, the people looked in the
warehouse and said, these things have been sitting here for 2
or 3 years, did anybody on the base need them? No, nobody said
they needed them, and they got rid of them. So it was just
simple human error there as to what these were and what they
were to be used for, because they didn't have an inventory
system that said--that had anything. It was just some boxes in
a corner of a warehouse, and they were trying to clean out that
part of the warehouse.
Mr. Kucinich. Let's say that there was an immediate need
for these suits. How would anyone know how to get them?
Mr. Kutz. That would be our biggest concern, is if there
was immediate need to know where the--if something happened in
some part of the world and they needed to call up and move
these from one location to another, it would be very, very
difficult for them to do a lot manual intervention, data calls.
Mr. Kucinich. How long did you take to find out that you
didn't know where they were?
Mr. Kutz. I'm not sure I understand the question.
Mr. Kucinich. How long did it take you to make a
determination that you couldn't trace these? How much time had
you put in when you finally arrived at the conclusion we can't
find these?
Mr. Warren. That we knew pretty quickly. In other words, we
knew that the only comprehensive data system was at the DLA
warehouse system. Once the items left the DLA warehouse system
and went to the services, we knew that there were not existing
data systems that would track them on a routine basis. So that
was apparent pretty quickly that our----
Mr. Kucinich. OK, so you can't--we're still back to about
1.2 million.
Mr. Warren. Yes, sir.
Mr. Kucinich. That you can't really say where they are.
Mr. Warren. Correct. We knew that pretty quickly, and by
that we knew that our initial recommendation had not been
implemented in any way.
Mr. Kucinich. Are you aware of any system--any of you
gentlemen aware of any system which the Department of Defense
has that they can, if they needed 1.2 million suits
immediately, they could put out a call and say, check your
closets or the garages or whatever for these suits? I mean, is
there any way that they can----
Mr. Smith. Other than doing a basic data call, there is no
automated system that would be able to tell you today where the
1.2 million suits are located at. They would have to do a
worldwide data call, the same as they did when they tried to
recall defective BDOs. Again, the accuracy of that data call
has proven it is not accurate. So the answer basically would be
no. They do not know where they're located at.
Mr. Kucinich. So we really don't have the ability to--what
you've shown in this one case is that you really don't have the
ability to track this all the way. You know, this whole hearing
was about tracking a single item. You're saying there's a point
at which you just can't track it.
Mr. Smith. That's true. At the unit level. The other thing
I'd like to clarify is that in the hearing 2 years ago, the DOD
IG even raised concerns about the DLA system which controls the
400,000. So there's some question raised about that. The DOD IG
said that system is chronically inaccurate. So it is
questionable even for that system if that information is
correct.
So, again, throughout the entire chain, as shown on the
board, there is no visibility over all these suits. No one can
tell you today where the 1.6 million suits are located with any
degree of assurance that they would be able to pull them all to
a single location and redistribute them.
Mr. Kucinich. Let's go back to the beginning. Why were
these ordered in the first place? Why would you need this kind
of protective gear? Why do soldiers need this? Anybody.
Mr. Kutz. To protect them in a contaminated battlefield
environment.
Mr. Kucinich. Chemical or biological?
Mr. Kutz. Either.
Mr. Smith. Both.
Mr. Kucinich. What kind of protection would this give the
men and women?
Mr. Smith. It is supposed to be able to protect them today
against all known chemical and biological weaponry that could
be used upon them.
Mr. Kutz. And provide them the flexibility to do their job
with minimal--the older suits were more bulky and less flexible
and were hot, apparently, in certain environments. These
apparently are more comfortable for the soldier to wear.
Mr. Kucinich. This is a $320 million contract. Where were
these made?
Mr. Smith. Actually it's a $1 billion contract.
Mr. Kucinich. It's $1 billion contract?
Mr. Smith. It's $1 billion, which includes a surcharge that
is paid to DLA for the storage and administration of the
contracts. So the number you used before, that was just for the
suits that had been purchased. But the total contract is $1
billion.
Mr. Kucinich. OK, a $1 billion contract; who was it awarded
to?
Mr. Smith. The suits is being made by five different
companies. So it is spread out through those five companies,
and there's different pieces of the suits that are also bought;
kind of raw materials, the outer shell, the liner, they are
bought. So different companies are involved in the process.
Mr. Kucinich. Where are the companies located?
Mr. Smith. They're all located--the liner company is from
Luscher. The rest of the companies are here in the United
States.
Mr. Kucinich. Where is the liner?
Mr. Kutz. Luscher, in Germany.
Mr. Kucinich. I looked at the tag in here, and it says
National Center for Employment of the Disabled. What is that
about?
Mr. Smith. That's one of the manufacturers of the suit.
Mr. Kucinich. OK. What does that particular manufacturer
do? Is that, you know, is that somebody--obviously is that a
government agency that--why is it called the National Center
for Employment of the Disabled?
Mr. Smith. That is one of the manufacturers. It's the way
the contract----
Mr. Kucinich. Is that a charitable organization?
Mr. Smith. It's not charitable. But there's different
procurements that it has to go through, and there's different
options that this has to be offered to different organizations
through the DOD process. I think that gets back to what Dr.
Coyle said about different regulations, different requirements
fall upon DOD than you would have in the private sector.
Mr. Kucinich. I understand that. I think it's wonderful to
hire the disabled, but I'm wondering how the National Center
for Employment of the Disabled is part of a $1 billion contract
to make these suits that is the subject of these hearings. I'm
just wondering, could you tell me a little bit about that? I
think it's a wonderful idea to hire the disabled. Is this a
U.S. Government operation or is this a private for-profit?
Mr. Smith. It's an organization--we went to the one down in
Tennessee. That's part of the contract. It's the way it's set
up. It is a U.S. entity that is not--it's not U.S. Government,
it's a private entity.
Mr. Kucinich. Is it a profit, nonprofit? Sounds like a
nonprofit, doesn't it?
Mr. Smith. That I am not sure of.
Mr. Kucinich. The difference is, if it's nonprofit, there's
one price. How would--this relates to price, Mr. Chairman.
They're charging 200 bucks for these, and Ms. Schakowsky raised
a great question because she said, you know, if they're selling
them for $3 on the Internet, are they really worth $200 to
begin with? If these are being made by people who are disabled,
how much are they being paid? These are issues that are real
here. Are the disabled people really getting a benefit out of
this, or is somebody, you know, hiring people who are disabled
and paying them minimum wage and then charging the government
as though the wage component was, you know, $120 or $200. I
think that's a fair question.
Mr. Kutz. We did not get into that. Let me mention one
reason why these might have been selling for $3 is there was
again some human error. At one of the locations, the individual
at the Naval Ordnance Disposal Unit in Hawaii--and the one I
held up earlier that was not a training-only, but was a good
unit, they actually had marked it when they sent to the DRMO to
be excessed as E, because they thought it was in excellent
condition. Well, E actually means that the items are damaged.
So it may very well be that the purchaser thought that these
items were damaged and therefore they may have been bidding
less money on these.
Mr. Shays. If the record would note, we have requirements
on DOD to hire a certain number of disabled, and Native
Americans I think are involved in the making of some of these
suits as well. I don't know if that's the real focus of this
hearing right now. But we do increase the cost to the
government sometimes in some of our hiring practices, but we
also want these to be made by U.S. citizens, for security
reasons as well. So there are a lot of factors involved that
I'd love us to address sometime, but I hope we stay on the
focus of the inventory, how it's being handled, whether we can
improve it.
And one of the questions Mr. Kucinich clearly pointed out
is, we simply--we don't know if a lot more of these suits
weren't sold.
Mr. Coyle, as you hear this as well, I would think your
mind would be going clickety-click-click, click here--maybe
I'll get my chance. But I want us to invite all the witnesses
here to respond. And, Mr. Lewis, you've got the floor.
Mr. Lewis. Thank you again, Mr. Chairman. The Department of
Defense, do they have an ongoing inventory process for the
different departments and agencies within the Department of
Defense? Is there a requirement that they have at least a
biannual inventory count?
Mr. Warren. They're continually looking at the inventory
that they have under their control. There are requirements for
physical counts for control and financial accounting purposes.
There are also requirements--perhaps this would be helpful to
the other questions--there are also requirements as they look
at the inventory that they have under their control at the
various units, if it is declared excess to their needs, rather
than carrying the carrying cost of holding onto those items,
they are required to put it into the disposal process which we
are talking about today.
And that can move through various phases. It can be
redistributed to other units, which you would have hoped would
have happened here, but did not. It can be distributed to other
Federal agencies. And it can be distributed to voluntary
agencies.
Once it goes through that type of priority regime, then it
moves into the sale process which we have discussed this
morning. Over time, over history, what happens to items that
are then declared what they call surplus--no longer to the need
of the Federal Government--typically have sold for 2 cents on
the dollar. So it is not unusual that these items sold at this
very low price under the typical Department of Defense disposal
process.
Mr. Lewis. Is there a central data bank that you can look
to see where any specific inventory items would be at any given
time?
Mr. Warren. It varies, obviously, from service to service.
The Department of Defense operates a largely decentralized
management process for its inventory management processes. Some
items, sensitive items for example, are controlled in a much
better manner; firearms for example, sensitive missiles, in a
much better manner than other items. Clearly this item that
we're talking about today is not controlled in that manner. The
systems typically do not talk to one other, particularly across
services, if there was an opportunity to share assets. And that
has particularly been a problem.
So when they did the Y2K exercise, for example, to try and
correct that issue, the Department identified over 1,000
individual logistics management systems across the Department
of Defense. So that gives you again an idea of the
proliferation of logistics management systems that exist today.
Mr. Kutz. Representative Lewis, one thing I was going to
mention, of the 1,934 suits that have been excessed, we did
identify that 275 were reutilized, which means they went back
to the government system. We did find, for example, that 200 of
them went to the Marine's First Tank Battalion. So some of
these did get back into the DOD system when they were, I think,
put up on the DRMO site that others can go in and look at. So
some of these did get back into the system. How the other ones
got through without going through that process is not
completely clear.
Mr. Lewis. Dr. Coyle, how difficult do you think it will be
to put in place an efficient supply management system that, you
know--that could be as accountable to the inventory as a Wal-
Mart or Sears or some of these other large companies?
Mr. Coyle. As I tried to suggest in my comments before, it
would be very challenging because of the complexity. There are
so many different items of inventory, NSNs as the military
refer to them.
Just to give you an example, we were working with the
Defense Supply Center in Columbus. They were handling 1.8
million unique items of inventory, 1.8 million unique items or
NSNs. You go to a very large store, Home Depot, for example,
the typical location for them would have 70,000. So you've got
a tremendous level of complexity. The Defense Supply Center,
they had 22,000 customers but 450 of them had accounted for
over 80 percent of their sales. So they have some challenges.
However, as was suggested here by several other people, it
is possible to make, I think, tremendous--or to make
significant changes. Information, obviously, is very, very
important. But in addition to having reliable information, you
have to have timely information. And that requires that the
systems interface with each other.
The biggest challenge that I saw, as I looked as I did some
work with the Marines a couple years ago, is that if you look
at their operating architecture, it's like a spaghetti bowl.
They have all these different systems that don't interact with
each other. Some are archaic, some are obsolete. They have some
real challenges in trying to keep track of inventory, get that
kind of visibility you want. But it is possible. It's going to
be more challenging than any single corporation that I know of
to be able to do that.
Mr. Lewis. It seems to me like with the technology we have
today, that there's no excuse for using pencil and paper and
blackboards. You know, there's got to be, and there is, a
better way to deal with some of these.
Mr. Coyle. There's no question--you can look, you can visit
almost any large corporation today, as some of these gentlemen
at the table have, I'm sure, and I have myself, and you'll see
lots of different ways of companies that are doing that. There
are different kinds of technology, but there's a lot of
similarity across those organizations as to what they've done.
There have been mistakes made--you've read about them in
newspapers--with different corporations. But underlying all
this, you know, the suggestion about what technology can do--
you really have to make sure that you change the processes. You
got to reengineer. Because if you throw technology at the
problem, it doesn't solve the problem.
Every company I've ever worked with that have tried to
throw technology at the problem have ended up costing
themselves a lot of money. They got to start basic with the
processes. You talk to--somebody mentioned Sears here at this
table. Sears Senior Vice President for Supply Chain Management,
a 30-year career Army officer, is a 3-star general, retired
from the Army after 30 years, and went to Sears. He's
revolutionized the way Sears does their logistics and their
supply chain. Obviously, he didn't just bring the Army
techniques with him, but some of them. He's looked at, you
know, what's going on, what's possible, and, you know, has made
a lot of changes. There are some bright people in the military
services, I think, that given the proper support can make some
appropriate changes.
Mr. Lewis. Absolutely. I agree.
Mr. Shays. Would the gentleman yield for a second on his
time? I mean, this is intriguing to me, because you're saying
we have--I was wondering if we simply aren't hiring the best
and the brightest in the military, and therefore the private
sector does it. But there is a reason why he didn't--was he not
empowered in Defense to do this?
Mr. Coyle. It was interesting, in the Persian Gulf War he
was the chief logistics person in the Persian Gulf War. And,
you know, given the technology that was at his disposal at the
time, and the processes that were in place, you know, a lot of
good things happened in preparation for that effort. But there
have been some criticisms about the buildup, the so-called
bull-whip effect in the inventory that you had before the
Persian Gulf War, but I think that was attributable to the lack
of information.
And you keep referring to inventory visibility. I couldn't
agree more. That's a critical ingredient for success.
Mr. Shays. What this raises, in my judgment, is something I
hadn't thought about until you just made the point. I mean, I
basically felt it was people without the expertise or ability,
paid a salary that didn't enable them to, you know, get the
kind of--that the expertise that they needed--in a system that
was bad, just teaching them bad process and reinforcing it.
And yet I've known for years that DOD is one of the best
educators. They take someone, and value added when they get
these young men and women is significant. And what I'm
wondering is, is maybe DOD doesn't have the ability to
recognize these people, to put them in the forefront where they
get to make the decisions. And so, you know, obviously they had
them in the Gulf War, but you've got a major company that has
benefited tremendously from it.
Mr. Coyle. From his experience and what he learned during
his educational processes before he joined the Army or went in
the Army, and what he learned afterwards, I agree, there are a
lot of very bright people there. I think some of them are
frustrated by the lack of opportunity for them to make changes
they see.
It goes back to something I didn't mention in my
presentation that probably someone else has already suggested,
that performance measurement is a critical ingredient for
change. And rewarding, you know, appropriate performance
measurement, I'm not sure that the metrics, if you will, the
performance measurements that we have in place drive the type
of change that you want to achieve.
Mr. Shays. Doctor, when I have you for my questions, I'm
going to say ``doctor, doctor, doctor, ``because I just called
you ``mister, mister, mister,'' a few times here.
Mr. Coyle. I can tell you a funny story about that
sometime, and I will.
Mr. Shays. It would be fun to hear something funny that
doesn't cost us so much. But we have had too many hearings, and
I almost found myself saying to my staff I don't want another
hearing on this. Then I realized I'm guilty of the same thing
DOD is. They've ignored this issue for years in not succeeding,
and we have to win. And I want to know how we win ultimately.
I have a good friend who works in organizations whose
strategy is this: difficult, impossible, done. I'd like to
think that's part of the military way of getting things to
happen. But we have failed miserably for decades in this area.
And I'm sorry my time is up--or Mr. Lewis' time is up. Is it
Mr. Tierney or Ms. Schakowsky?
Ms. Schakowsky. Thank you, Mr. Chairman.
Dr. Coyle, you talked about horizontal and vertical
coordination, and then you talked about performance--measuring
performance. I've concluded that we have to start talking about
the culture at the Department of Defense because we clearly
have a Department where there are no consequences to
sloppiness. It is a culture of sloppiness. That's the only
thing that I can conclude. And nothing happens to somebody. OK,
so we lost 250,000 possibly defective suits, and we can't track
1.2 million new suits, and we auctioned them for $3. Nothing
happens to people. Or, on the purchase cards, we had a whole
hearing in the other subcommittee on purchase cards. Little to
nothing happens to people who misuse them. So there are
absolutely no consequences. DOD keeps failing audits, we keep
passing higher and higher budgets. Nothing happens over and
over again.
Wouldn't you say that there have to be some--there has to
be some consequence, somebody has to pay, some accountability,
some punishment, something has to happen?
Mr. Coyle. Sure. I think you put your finger on a very
important aspect of it, and culture is important in any
organization. And the culture has to support change, the
culture has to support doing things a better way, driving for
efficiency. But also underlying that, there have to be
appropriate performance measurements in place so that good
performance is rewarded and bad performance is penalized.
And I think what you're suggesting--and you obviously know
more about this than I do--is that bad performance is not
penalized. If this happened in the private sector, as you well
know, you'd be reading about it tomorrow in the Wall Street
Journal, and someone might be even investigated with a civil
suit and going to jail, as several people who are being
investigated at the present time. So performance measurement I
don't think is appropriate to stop some of those things from
happening.
Ms. Schakowsky. Mr. Kutz, you said that you found some
units used pen and paper and dry erase boards. So what happens
if that information gets erased? Is there any back-up, is there
any way to follow that up, or is it just gone?
Mr. Kutz. I would think it would be gone. And there were
some units that we looked at that had no records of these. They
received their shipments and they did not keep track. So, yes,
that would be gone.
Ms. Schakowsky. So it's like we're living in the middle
ages in some of these places that we can't even keep a record
of them. I wanted to get back a little bit to what Mr. Kucinich
was saying, and just suggest that while we didn't look at in
this study the issue of the products themselves and their cost,
Mr. Kutz, you had mentioned at one point that you're starting
to look into issues of vendor fraud. This isn't particularly
related to purchase cards. I'm wondering if that is proceeding
and that would be worthwhile, you think, to look at as well?
Mr. Kutz. We're looking at that, at the credit card issues.
We have not--I don't think we have any current studies underway
right now of that Department-wide. But there's a lot of bigger
bucks out there than the credit cards. So certainly with
respect to contract payment and vendor payment, there's a lot
of risk of fraud at the Department of Defense, and there has
been a lot of fraud identified over the years.
Ms. Schakowsky. Let me finally say that while there don't
seem to be any consequences for people at the Department of
Defense, regardless of what kind of waste, fraud, and abuse
there may be, the consequences--as has been repeatedly pointed
out over and over--the consequences are so grave here in terms
of it's life and death that we're really talking about here, as
well as billions and billions of dollars.
And so I just think, and I agree with you, Mr. Chairman,
you feel like oh, no, not another hearing. Well, maybe we do
need to think of something else besides continuing a hearing. I
believe that the American people--if this room were filled with
cameras, and there were lots--would be as outraged about this
as they get about Enron or anybody else. This is scandalous.
And there has to be some way to put a stop to this.
I appreciate that you continue to shine the light, and we
ought to think about how we can now get some sort of results.
Thank you very much.
Mr. Shays. Thank you very much.
Mr. Tierney. You don't know where to begin, do you?
Mr. Tierney. Yeah, I know where to begin. I'm all for
rewarding people that do well, but in this situation I'd like
to lop a few heads, frankly.
Is there a way, Mr. Kutz, that we can get a chart of,
besides the Secretary of Defense being responsible, who under
them is responsible for this mess, right on down the line to
the very bottom and their rank; because I'm willing to bet
there's all sorts of stars and badges and stripes on these
people who continually mess up, and they continue to get
promoted.
I disagree with Ms. Schakowsky. What happens is they get
promoted. It's not that nothing happens to them; they get
promoted by longevity, being in there. In the private industry
they get stock options, and in the military they get
promotions.
So is there a chart that we can have that would show us the
responsibility of who under the Secretary, and who under that
person, all the way down the line is responsible for this mess
so we can put a rank and a name to these people?
Mr. Kutz. It is hard to put a finger on who is responsible
here. That is one of the issues. Because you've got the
services responsible, you've got DLA responsible, you've got
the program office responsible. I think when DOD witnesses come
up, you can certainly talk to them about who they believe is
really responsible. But maybe that is one of issues here, is
that no one individual is responsible.
Mr. Tierney. Suppose we ask the DOD to give us their idea
of who's responsible; can you also give us your idea, having
gone through this, of who you think is responsible so we can
compare the two? Would you do that for us?
Mr. Kutz. Sure.
Mr. Tierney. If this was a hearing about lost erasers and
pencils in the Education Department, every damn member of the
press from around the country would be in here, banging around
and putting out stories about it. But because it's the
military, they're all napping at home and letting this go on.
It's just a disgrace it happens.
Let me ask you this. Is there a reasonable timeframe, Dr.
Coyle, that we might expect somebody to implement the best
possible system to correct this situation?
Mr. Coyle. As was suggested here a little bit earlier at
the table, I think you're talking about a time horizon of 3 to
4 years to implement something like that.
Mr. Tierney. You know, Mr. Chairman, what I think we ought
to do is talk about cutting this budget by $18 billion in 3 or
4 years, and the way they can save it is by doing better; and
if they don't, then they've got to find some way to make it up.
Because the longer there are no consequences and the longer
nothing happens, you know--where, Mr. Kutz, would we cut? Where
would we take that $18 billion, from what line items?
Mr. Kutz. One of the things we talked about--I don't know
about cutting--but one of the things we talked about at the
last hearing was some sort of way to control the IT money. I
mentioned earlier that the IT money is being shelled out all
over the place within the Department, and that's how you get
the proliferation of systems and everybody building their own
systems.
One thing that the Congress could do, which has been done
at a place like IRS, is to try to centralize that funding and
get control over it. Again I mentioned at the last hearing we
had that there's $26 billion in the budget for investment
technology, which includes weapons system type.
Mr. Tierney. Twenty-six.
Mr. Kutz. $26 billion, which includes business systems and
weapons systems, both of that in there.
Mr. Tierney. Can we separate out those amounts?
Mr. Kutz. We do not know the actual components. We're
looking at that right now. There's a report this big that
outlines the pieces, but certainly billions and billions of
that are for business system.
Mr. Tierney. There wouldn't be any chance you would have
that ready by the time we're doing the appropriation process,
would it?
Mr. Kutz. We can try.
Mr. Tierney. The appropriation process might be this week.
Mr. Kutz. Yes. I mean, we have the documents and we can try
to give you at least a first cut at what we think the pieces
are.
Mr. Tierney. I don't know what your disposition is on this.
It seems to me it would be responsible for to us identify how
much of that IT system is, and put a motion to centralize it
and begin this process of putting some control on it. I'd like
to work with you and Members on that side of the aisle to do
that just so we get some sort of control over it.
Mr. Shays. Would the gentleman yield? As we were conducting
this hearing, I was just writing the e-mail to my staff to see
if we could prepare some type of amendment to highlight the
failure to be able to audit, but particularly taking this part
of it which is the inventory, and seeing if we could come in
with an amendment that would kind of wake up our colleagues on
that.
Mr. Tierney. If I could just reclaim my time, in addition
to like concentrate on what Mr. Kutz just said, maybe working
with Mr. Kutz, identify that number and the proper language
that would allow us to centralize and get control over that IT
system, so that going forward here we can start, hopefully.
Mr. Kutz. We could certainly share with you the language
that's been used for the Internal Revenue Service, the Customs
Service, and others where that's been done.
Mr. Shays. Let me just say that's an excellent idea. It
would be nice to make it a bipartisan amendment. And I think
that the sooner you can get it to us, the better; because we
are going to deal with both the construction budget and the
defense appropriations.
Mr. Tierney. I just think that would--we've got to start
doing something constructive out of here instead of just
complaining about it. It may seem punitive or whatever, but I
think we're at the point where we should get a little punitive
here. But we've got to find a way that doesn't affect our
ability for national security, but at the same time wakes these
people up and maybe stops a few stars from being put on
people's shoulders, and we can look to who to reward if they're
doing a particularly good job, or why they're not finding
people with this kind of--let me also ask, would it make sense
to Dr. Coyle to have an advisory group, for the Secretary of
Defense, of industry and academic people who are really well
informed on IT and processes such as this, to work with them on
this, identify it? Or do we have that capability within the
military now?
Mr. Coyle. If you get the right group of people, I think
that would be fine. The problem sometimes is that retirees like
myself are appointed to those advisory groups, and some of them
aren't always up to date on the most modern technology. So
getting the right people in place is a challenge.
But I just want to emphasize again, the military has some
very bright people in at the present time. I've been impressed
with the quality of some of those folks and the education they
have. I think given an opportunity to work together, they could
drive toward some solutions.
Mr. Tierney. My thought is those advisory group might help
us identify those people and why they're not getting the chance
to make the impact they could, and separate them from the chaff
who are apparently in the way, and move that forward.
We ask people to step up to national emergencies all the
time. You know it's a disgrace, with some of the corporate
activities we see of going offshore, avoiding taxes and things
of that nature. But there are enough good people out there that
if we ask them to step forward and dedicate some of their
people to a cause like this, I think they'll respond.
Mr. Chairman, I don't know that it would be something the
President or Secretary would have to do, but perhaps we could
make a recommendation to them, or resolution, or something on
that basis, identifying the problem and telling them that the
Congress, or at least this committee, is behind them; finding
those kind of people and empowering them to make those kind of
suggestions, so that we don't just keeping banging around
inside the same barrel all the time. Maybe there are some
things that will come out of this today.
So just let me, to recount, Mr. Kutz, you're going to try
to work for us who you think is in charge of this thing all the
way, top to bottom. Mr. Chairman, I suspect we'll ask DOD when
they're in, who they think it is. We'll make some comparisons.
You're also going to work with us, Mr. Kutz, on some of the
language and focusing on the amount that's IT money out of
that, so we can put something together in centralizing that
aspect of it there.
And you know, Dr. Coyle, if you had any recommendations
about the people who are up to date, retired or not, who might
serve as sort of an advisory committee, if you would share that
list and start down that path at least.
Mr. Coyle. I'd be happy to do that.
Mr. Tierney. Thank you all very much for your testimony
today. I yield back.
Mr. Shays. Thank the gentleman. We're going to go to our
next panel. I just have a few questions. I want to be clear,
Dr. Coyle, what you would do if you had been a Member of
Congress for 20 years and you had sat in on a hearing like what
we've sat in on, and really there is no change in the story for
the last--and there's been a lot of efforts. I'd want to know
what you would be doing, both as a Member of Congress, but
someone who has the authority to make a difference, what would
you be doing?
Mr. Coyle. I would try to look at some of the root causes
that make these outcomes come about. Are these problems being
caused, for example, as was mentioned by one of the members of
the panel, by the regulations that you have in place in
procurement--that are very strict regulations about that--that
in effect preclude some of the types of strategic acquisition
practices that are going on in the private sector that allow a
company like Dell, for example, to do the kinds of things that
they do, or a company like Sears to do the kinds of things that
they do. Second----
Mr. Shays. Before you go to the next one, give me some good
examples of companies. You say Dell, Sears, give me some
others.
Mr. Coyle. Wal-Mart is another company. Kraft Foods is
another company. Let me just see----
Mr. Shays. Don't just give me all your clients.
Mr. Coyle. Johnson & Johnson. I'm sorry I missed that, Mr.
Chairman.
Mr. Shays. I was trying to be a little funny, but I----
Mr. Coyle. I missed that. I apologize.
Mr. Shays. I said don't give me all your clients.
Mr. Coyle. These are not clients of mine.
Mr. Shays. Good for you.
Mr. Coyle. They're not clients. These are names of
companies that are reported by the Supply Chain Council and
other groups for their outstanding supply chain.
Mr. Shays. So maybe we bring all of them in, you know, and
have them testify.
Mr. Coyle. Possibly. There's some talented people that you
could.
Mr. Shays. Which company is the firm that you mentioned
that hired the former military?
Mr. Coyle. Sears.
Mr. Shays. Sears. And that gentleman's name was?
Mr. Coyle. Gus Pagonis, P-a-g-o-n-i-s.
Mr. Smith. That is one of the gentlemen that we did talk to
as part of our study. Mr. Pagonis. He is also part of a group
that the Secretary of Defense has brought in from the outside
to look at various entities within the Department to try to
bring in some private sector expertise to look at DOD's
operations to improve them. Now, we can provide for you some of
the entities that they're looking at and what they're trying to
accomplish.
Mr. Shays. Evidently we wanted him to testify, but because
he is on the task force he declined. I don't know the logic of
that. But then again, maybe we'll get the task force in. Then
he could come.
So one is the regulations that make it difficult. Another
is to look at some of the people. And from that we talked about
bringing in some of those good firms. I got sidetracked.
Besides regulations that make it difficult, to bring in
strategic thinkers.
Mr. Coyle. Another one that I would point you to is does
your budgeting process--having worked at the university for 40
years and have a year-to-year budget--when the end of the year
comes around, if you have anything left in your budget, you're
afraid not to spend it for fear you'll get your budget reduced
next year.
Mr. Shays. The budget process.
Mr. Coyle. The third one that I would look at is personnel.
I think, for example, in some parts of DOD, particularly in the
military, people are rotated pretty quickly, every 2 years, and
somebody might start a new program and not have a chance to see
it through. There's some challenges there.
Mr. Shays. Well, it's interesting, because my staff was
just mentioning that the IRS individual, I believe, that was
hired to kind of take charge of this, there was an agreement
that they would kind of transcend administrations. And we're
looking at not just the issue of administrations, we're looking
at the policy of rotation that gets you in and out real quick.
Mr. Coyle. I would also say, take advantage of some of the
good people that are there, because there are some outstanding
individuals I think there.
Mr. Shays. But besides looking at rotation, we look--we
should look at the reward--I don't want to say reward and
punishment.
Mr. Coyle. Performance measurement. Performance measurement
is the term.
Mr. Shays. Performance measurement: Are we really
identifying the people that can make a difference. You know
what--what's fascinating, absolutely fascinating to me in the
three things you issued: regulations.
Mr. Coyle. That's off the top of my head now.
Mr. Shays. This is a compliment, I think. Regulations,
budget process, and personnel. You didn't mention technology.
You know what? Technology is the first thing that we've always
focused on. And so we all have--I mean we, the Department of
Defense, when they've spoken to us we said, yes, it's
technology, you need new technology. You didn't even mention
it. Not that it's not important, but it tells me how important
you think these other things are.
Mr. Coyle. Basic.
Mr. Shays. Yeah, basic.
Mr. Coyle. You can't solve a problem on technology unless
you change the process.
Mr. Shays. OK. Well, this has been interesting. Is there
any question that Mr. Kutz, any of your folks, Dr. Coyle, you
want to put on the record before we go to the next panel?
Mr. Warren. I'd just like to add to that question, one of
the fundamental problems is the current organizational
structure of the Department of Defense for accomplishing these
business processes that have grown up over some 30 years now,
and the breaking down of those processes has tremendous impact
on all employees across the Department, to include civilians
and military personnel, so the actual reengineering of the
business processes, as Dr. Coyle was talking about, is not just
coming up with better business processes, it then results in
major reorganizations to the way activities are performed,
which then leads to this huge cultural resistance to change.
And that would have to be something that would be addressed in
order to achieve what we've been discussing today. And I think
that's one of the keys that's at the heart of why change does
not work very well.
Mr. Shays. Yeah.
Mr. Warren. It's almost like base closures.
Mr. Shays. I'm almost finding this frustrating in the one
sense of because we spend so much time and we focus on
testimony, and we've had people tell us why this didn't work
because of this technology, and then when get technology it
gets outdated by the time it's implemented because of
procurement processes. And, you know, technology didn't even
show up in this discussion, which is wonderful, but----
Mr. Coyle. Let me add a caveat. I'm not trying to say
technology isn't important. If you look at some of these
companies, you find they're trying to take advantage of
technology to use it to their competitive advantage.
Mr. Shays. You need the technology. I mean, we would----
Mr. Coyle. It's a facilitator.
Mr. Shays. We wouldn't have people living in cities if we
didn't have air-conditioning. I realize we're not going to be
able to do the things K-Mart does without the technology, but
we have to look at all the other things.
Mr. Kutz. We looked at the technology as the symptom of the
problem rather than actually the root causes. The root causes
we identified when we testified before were the lack of
leadership, cultural resistance, etc. The technology and the
1,127 systems you've seen, to us I think would be kind of a
symptom of what those root cause problems are.
Mr. Shays. I know you did say that. I guess my--when we had
the Defense folks up, it was kind of focused on technology. So
I'm not saying you guys didn't alert us, but it didn't sink in.
I guess you have to tell us more than once.
Anything you want put on the record before we get underway?
Dr. Coyle, you rushed to get here and your time has ended. But
if you had the ability to stay, I would like to suggest that I
would call you up, or any of you GAO folks, after DOD speaks
to, you know, put something on the record that you may need to.
So if you have the time to stay and hear the DOD folks, it
would help us.
And let me say to you, we've got great people working at
DOD. So this is--we just need to know how to help them.
I think we're done. Anything else, gentlemen, that you--
thank you. Nothing else to put on the record? You didn't stay
up all night preparing for a question we didn't ask that you
want to ask yourself? Nothing? OK.
So thank you. We're going to go to our next panel.
Our next panelist is Ms. Ann Boutelle, Director, Commercial
Pay Services, Defense Finance and Accounting Service,
Department of Defense--these are all Department of Defense; Mr.
Douglas Bryce, Program Manager, Joint Service Lightweight
Integrated Suit Technology, JSLIST; and Mr. Bruce Sullivan,
Director, Joint Purchase Card Program Management Office,
Department of Defense.
So we have the Director of the commercial payment and then
the two areas that we were looking at. And if I could get you
to stay standing, I'd like to swear you in. As you know, only
one we've never swore in was Senator Byrd, and that was because
I chickened out.
Is there anyone else that might want to respond to a
question? Any of you folks that would want to stand and be
sworn in? I don't want to swear in a person once we start. So
are we all set. Nobody else?
[Witnesses sworn.]
Mr. Shays. Thank you.
So pretty brutal stuff we're considering. I know you all
are--you haven't worked in--I assume you all haven't worked in
Department of Defense all your lives, and you're trying to make
a difference here. We want to help you, and we're going to
start with you, Ms. Boutelle, and then go to Mr. Bryce and then
to Mr. Sullivan. OK? Great. And the way the clock works, it's 5
minutes, and we roll it over for another 5 minutes, and you can
use part of that 5 minutes.
STATEMENTS OF JOANN BOUTELL, DIRECTOR, COMMERCIAL PAY SERVICES,
DEFENSE FINANCE AND ACCOUNTING SERVICE, DEPARTMENT OF DEFENSE;
DOUGLAS BRYCE, PROGRAM MANAGER, JOINT SERVICE LIGHTWEIGHT
TECHNOLOGY SUIT, DEPARTMENT OF DEFENSE; AND BRUCE E. SULLIVAN,
DIRECTOR, JOINT PURCHASE CARD PROGRAM MANAGEMENT OFFICE,
DEPARTMENT OF DEFENSE
Ms. Boutelle. I guess it's good afternoon now. Good
afternoon, Mr. Chairman, Congressman Kucinich and members of
the subcommittee. My name is JoAnn Boutelle, and I am the
Director of Commercial Pay Services of the Defense Finance and
Accounting Service, DFAS. Within DFAS, our accounting and
finance systems provide a full range of services to accommodate
the various procurement processes, including those used to make
the payments for the two items under discussion today. These
are purchase card transactions and procurements administered by
the Defense Contract Management Agency, DCMA. I welcome the
opportunity to discuss with you the results of the GAO sample
for these purchases.
As you know, the Department of Defense has many procurement
regulations, guidelines and policies. DOD mandates the use of
the purchase card as the method of purchase and payment for the
less complex acquisitions valued at and below the micropurchase
threshold, like the purchase of the computer item GAO
identified in their audit.
The Purchase Card Joint Program Office issues DOD-wide
guidance and policy for the Purchase Card Program, while the
individual DOD components are responsible for establishing and
implementing their local Purchase Card Program and procedures
in accordance with the GSA Smart Pay contract. For purchase
card services, DOD is serviced by two banks, US Bank and
Citibank. Both banks provide the capability for online purchase
validation and invoice certification. The DFAS customers save
about 60 percent of the billing charges if they choose to use
the online purchase validation and invoice certification.
While there are substantial savings to utilize the
electronic purchase card interfaces, not all agencies have
completed implementation of the program. The GAO audit
identified that DFAS Columbus as of yet was not using an
automated bank process. This is correct. The initial deployment
was targeted for the largest users in the United States, the
Department of Army, the Department of Air Force and Department
of Navy. These had been substantially implemented, and the
defense agencies are scheduled for later this year. The change
necessary to enable the accounting system used in DFAS Columbus
to accommodate the electronic obligation transaction is in
testing and evaluation and will be installed in the very near
future.
The biochemical suits GAO selected in this review are a
complex item requiring a more sophisticated procurement method.
The acquisition of these suits by the services requires
specific levels of quality assurance testing and financing
arrangements. The Defense Contract Management Agency manages
these more complex procurement transactions using the
Mechanization of Contract Administration Services, MOCAS,
system. In addition, DFAS Columbus uses MOCAS to pay financing
and deliverable invoices.
The MOCAS system is capable of processing electronic
transactions for contracts, receiving reports and invoices.
Currently DFAS receives about 74 percent of the biochemical
suit invoices electronically. The DOD services and agencies
could reduce their DFAS bill by processing contracts and
receiving reports via electronic means. For instance, the MOCAS
manual rate is approximately $20 more per invoice than the
electronic rate. To receive the electronic rate, both the
contract and invoice must be received electronically.
DFAS is an active partner within DOD to improve the end-to-
end transactions and to use this technology in order to enhance
the electronic processes. We have used conferences, training
seminars and presentations to educate our contractors,
contracting officers, program managers and financial managers
on the end-to-end procurement payment process. These efforts
have improved the Department's overall procurement
administration and payment functions.
Mr. Chairman, this concludes my remarks, and I'll be happy
to answer any questions.
Mr. Shays. Thank you, Ms. Boutelle.
[The prepared statement of Ms. Boutelle follows:]
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Mr. Shays. Mr. Bryce.
Mr. Bryce. Mr. Chairman and members of the committee, I am
Mr. Douglas Bryce, the Program Manager of Nuclear, Biological
and Chemical Defense Systems, Marine Corps Systems Command,
Quantico, VA. I'm pleased to appear before you today to discuss
the Joint Service Lightweight Integrated Suit Technology
program, commonly called JSLIST. I would like to move into my
opening remarks, right into the inventory issues that have been
talked about earlier and make an opening statement about those.
The inventory control of JSLIST is accomplished through the
efforts of the Program Office, each of the services, and the
Defense Logistics Agency. The JSLIST suits held by the Defense
Logistics Agency are tracked by national stock number, contract
number, lot number and manufacturing date. They have visibility
on JSLIST production lots up to the point that they are
released to the individual services. Once that happens,
accountability becomes a service responsibility. Tracking
JSLIST from the manufacturer to the using unit is just not
possible today, because we have not provided all of our using
units the tools to accomplish this task. We have been aware of
this issue and have taken steps to provide total asset
visibility in the very near future.
We are aware that commercial/private sector firms routinely
accomplish similar tasks at wholesale and retail levels. Wal-
Mart and Sears, for example, have automated systems in place to
track inventory, ordering and shipping at near real time for
all locations.
We have planned a pilot program for JSLIST that will allow
us to use traditional bar code, radio frequency identification
tagging, scanners and readers to track the overgarments from
stocks in Albany, Georgia, to the receiving unit. We have
tagged these 5,000 suits for the pilot effort and arranged for
units in the Second Marine Expeditionary Force at Camp Lejeune,
North Carolina, to receive them. We will track the movement at
several commands to validate near real time visibility.
Collaterally, we will attempt to migrate information contained
in the bar code to an existing data base, with an ultimate goal
of being one system that can be shared and accessed by each of
the services.
So a successful end state would be one that finds the
Defense Logistics Agency, the Program Office and the services
able to track JSLIST from the manufacturer, through DLA, to the
services and operating units receiving the suits by having near
real time total asset visibility.
The Defense Logistics Agency and Defense Supply Center
Philadelphia have also embarked on a plan to replace the
Standard Automated Materiel Management Systems with state-of-
the-art systems called Business Systems Modernization. This
system is expected to be user-friendly, flexible and fully
implemented by fiscal year 2005. This will allow more accurate
tracking of the Defense Logistics Agency's inventory. However,
the Defense Supply Center Philadelphia has asked that the
chemical protective apparel, especially JSLIST, be included in
an early release for calendar year 2003 to ensure that the
system can in-fact track shelf life items. This, linked with
the services' bar coding effort and a servicewide data base,
should provide the visibility of all on-hand assets regardless
of the suit location. This should also significantly reduce the
manual processes used today in tracking JSLIST.
One problem that continues and will continue to plague us
is tracking JSLIST once it has been issued by the services. We
have no control over the actions of end-user units or
individuals. In fact, in just the past week, as you are well
aware, we have become aware of JSLIST garments that have been
disposed of in Hawaii and New Jersey. We are attempting to
recover these suits and have tasked--and I have tasked a
section within the Program Office to start monitoring the
Defense Reutilization Management Office Website for similar
occurrences.
Mr. Chairman and members of the committee, I believe that
we have addressed and can address the issues of inventory
tracking hopefully to your satisfaction. Subject to your
questions, those are my opening remarks.
Mr. Shays. Thank you, Mr. Bryce.
[The prepared statement of Mr. Bryce follows:]
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Mr. Shays. Mr. Sullivan.
Mr. Sullivan. Mr. Chairman and members of the
subcommittee----
Mr. Shays. Is your mic on, sir?
Mr. Sullivan. I'm sorry.
Mr. Shays. Thank you.
Mr. Sullivan. Mr. Chairman, members of the subcommittee, my
name is Bruce Sullivan, and I'm the program manager of the
Defense Department's Purchase Card Program. The Program Office
was established in March 1998 to centralize management of the
program within DOD. I am responsible for promoting purchase
card use, coordinating DOD card requirements with the General
Services Administration, managing delinquencies, developing and
deploying the standard DOD-wide card management system, and
developing a DOD-wide training program. As program manager, I
report directly to the Director of Defense Procurement.
Early in this assignment, I recognized substantial
challenges to the successful implementation of a standard
business process within the DOD. These challenges are the same
as those described by the GAO during its testimony on June 4th.
Institutional and cultural resistance to change and military
service parochialism were my biggest adversaries. At times it
appeared that change in how we do business or implementing
changes that weren't invented here would be impossible.
Additionally, the maze of numerous finance and accounting
systems that DOD, as well as its vendors and contractors, have
to navigate through to submit, certify and pay invoices
presented its own challenges.
I am here today to tell you that DOD has implemented more
efficient purchase card processes, and they are being used
throughout most of the Department. Early in the card program,
card officials found that they could buy their items easier and
faster, but they were still faced with the same old paper-based
bill payment process. The process was slow, time-consuming and
required multiple data entries. If purchases were not
summarized on the invoices from the card-issuing banks, the
payment processing charges levied by the payment office could
be as high as if each transaction had a separate invoice.
The old process can be depicted in six steps: Cardholder
purchases and receives the items from the merchant. The
merchant bank processes the card transactions. The card-issuing
bank pays the merchant. The card-issuing bank then mails the
monthly payment statements to the cardholder and the approving
official. The cardholder reconciles the statement, attaches
supporting documentation, and submits the reconciled statement
to the approving official. The approving official reviews
purchases, approves and certifies the invoice, and then mails
the certified invoice to the payment office. The payment office
electronically pays the card-issuing bank.
Under this paper-based and mail-reliant process, the
ability to review transactions was limited to the end of the
billing cycle when the paper statements were received by the
cardholders and approving officials. Any mail delays such as
we've recently experienced in the wake of the anthrax threat
could add weeks between the time the card-issuing bank sent an
invoice and the time it received payment.
In 1998, the GAO recompeted the contract for the
governmentwide card services. Competition gave DOD the
opportunity to require the card issuers to incorporate new card
technologies in their contract proposals. It was our intent to
leverage commercial Internet-based technologies that were not
then being used within the Department to further streamline the
bill-paying process. As a result, card officials now have an
online capability to set up, revise and cancel card accounts,
and to review in real-time credit card transactions as they
post to the bank's systems.
This second capability allows officials to review and
approve or dispute transactions without waiting every 30 days
for the paper statements to be received. The online systems
also allow cardholders to reconcile their accounts, and billing
officials to certify the statements online 1 day after the end
of the cycle. Online certification occurs weeks before paper
statements would even be received. Upon certification, the bank
reformats the invoice, consistent with commercial electronic
data interchange standards. The reformatted invoice summarizes
or rolls up all the cardholder transactions by lines of
accounting. The bank then transmits the certified invoice via
secure means to the supporting finance and accounting system
where the invoice is electronically entered.
DFAS has done an outstanding job of mapping its systems to
accommodate these electronic invoices and has lowered its rate
it charges its DOD component customers for billing service by
as much as 60 percent, a real incentive for the components to
use the online process. Currently over 50 percent of the Navy's
invoices and about 80 percent of the Army and Air Force
invoices are paid with this process. The DOD Government Charge
Card Task Force has recommended that the Department accelerate
electronic certification and bill-paying systems for purchase
cards, requiring the components to use the card-issuing bank
systems or obtain a waiver from the component's chief financial
officer and acquisition executive.
The online process was developed to support the most common
use of the card, purchases within the acquisition micropurchase
threshold of commercial items and services. It did not address
the purchase items requiring a more sophisticated acquisition
process, which may require multiple levels of preapprovals in
individual line item funding. While some working capital
activities have migrated to the banks' systems and confirm the
ease of managing financial aspects of their programs, not all
have agreed that systems can be used efficiently. Some complain
that cardholders must reconcile two systems, the bank's and
their component or activity internal system.
In certain instances, a component may have or may be
developing systems that will offer capabilities equivalent to
the banks' systems. These should not--these should be
considered as acceptable alternatives to the banks only if they
perform the same functions and have the same or better internal
controls as those in the banks' systems. We are working with
the components to resolve these issues.
Mr. Chairman, the online surveillance of cardholder
purchases and the process-mandated cardholder reconciliation
within this initiative, coupled with initiatives developed by
the DOD Charge Card Task Force, strengthen our program of
purchase card internal controls. Collectively these initiatives
will deter or identify cardholder fraud, waste and abuse.
This concludes my statement. I would be pleased to answer
any questions you or other members of the subcommittee may
have.
Mr. Shays. Thank you very much, Mr. Sullivan.
[The prepared statement of Mr. Sullivan follows:]
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Mr. Shays. Mr. Kucinich is going to start off. Then he
needs to get on his way. I may have my staff ask some
questions, and then I'll be asking some questions.
Mr. Kucinich.
Mr. Kucinich. Thank you very much, Mr. Chairman.
To Mr. Sullivan, maybe you can help me with this testimony
that was presented by the previous panel when they were talking
about selected line items from purchase card monthly statements
and related DFAS processing fees.
They have a chart here which lists vendor, the amount of
purchase and the processing fee. Staples, the amount of the
purchase was----
Mr. Shays. Do we have that on one of the panels that you
had? Maybe we could just stick it up there? We don't have that
one?
Mr. Kucinich. OK. You know, I always feel and just think
it's important that we track a signal item in this--in the
previous hearing, we focused on the suit through the whole
process so we could learn something. I wanted to focus on a few
items here to see what we may be able to learn about this--the
practices of the DOD.
The vendor, Staples; amount of purchase, $4.37; processing
fee, $17.13. Vendor, Culligan Water Conditioning; amount of
purchase, $5.50; processing fee, $17.13. The vendor, Office
Depot; amount of purchase, $8.59; processing fee, $17.13.
Can you explain how we're in a system where we have
transactions where the processing fee is costing anywhere from
two to three times what the item purchased costs?
Mr. Sullivan. I believe the processing fee there is what
DFAS charges to do the accounting and bill payment for the
purchase card. Typically throughout the Department what we
require is that cardholders summarize the bill, so that if a
cardholder had a bill with those type of purchases on it, there
would be one line of accounting to be used for all those
purchases. That's what would be sent to the Defense Finance and
Accounting Service. There would be one charge for all of the
individual purchases under that.
Mr. Kucinich. Could Ms. Boutelle--would you like to help
with that?
Ms. Boutelle. Mr. Sullivan is correct. The $17.13 charge is
what we charge to--if we have to input the documents to be able
to pay. So that is the charge per line of accounting to recover
our cost. If it had been sent in electronically, it would have
been $6.96 is what we would have charged. If the service would
have rolled up their purchases and consolidated them instead of
sending a separate line of accounting for the Staples, the
water conditioning and the Office Depot, if they had
consolidated them, there would have been one line of accounting
and one $6.96 charge if they had used the bank's automated
process.
But that is the charge for us to recover our cost for the
manual process.
Mr. Kucinich. Anyone else want to comment on that at all? I
mean, is this--so if we wanted to save money, you're saying the
way you do it is electronically.
Ms. Boutelle. Absolutely.
Mr. Kucinich. An in this case you'd save about 100--almost
200 percent in terms of cost.
Ms. Boutelle. Uh-huh.
Mr. Shays. Would the gentleman yield?
Mr. Kucinich. Of course.
Mr. Shays. Because the question--your answer raises some
questions. You said if they had consolidated. Now, what would
have told them to consolidate? How do they know that?
Ms. Boutelle. That is a service decision at what line--
level that they want to capture their cost. So when you heard
GAO mention earlier that we had received an invoice that they
looked at where there were 233 different lines of accounting,
if the service had decided that they did not need to know the
staples and the pencils and whatever else that was on that
purchase, that they did not need it down at that detail, they
could have rolled it to fewer lines of accounting. Then it
would have been a lower charge. It would have been either
$17.13 per line if we still had to do it manually, or it would
have been $6.96 if they had used the bank's automated system.
Mr. Shays. What determines whether it's manual or
electronic? I mean, what should Mr. Sullivan have done or his
people to make it electronic?
Ms. Boutelle. Well, I'll let Mr. Sullivan address that, but
I believe he's working very close with the services to get them
to implement the automated process. This one happened--the one
that they happened to look at in Columbus is a Navy activity,
which is kind of an anomaly that it is accounted for at
Columbus, and they are free to use the automated process today.
Mr. Shays. My time--I'll come back to this, but I need to
understand why it is $6, and that is my ignorance, because I
don't know. But I guess I don't understand what processing
means. It's a transaction cost, but I don't understand why it
needs to be $6. And I guess I should have asked the previous
panel as to what it would be in the private sector.
Mr. Sullivan--I'm sorry.
Mr. Kucinich. That's OK, Mr. Chairman. It's a logical
sequence of questioning here.
Mr. Tierney raised a question, and I wanted to join with
him in following up on it. Is it possible to establish--if any
of these gentlemen can--the lady can answer this question--a
chain of command on procurement? Who is it--who are the
individuals responsible at every level so that we can fix
responsibility to know exactly who made a decision that
resulted in, let's say, the--not being able to locate an item
or the amount that a taxpayer is paying and maybe the amount
that is wasted? Is this system built in such a way that you can
do that? Anyone?
Mr. Bryce. I'm not sure that the system is built to where
you could in each of the services go to a single individual and
point to them, although there are people familiar with those
processes, and that could be given to you. Each of the programs
work on their logistics, and sometimes they work very
independent of one another, and sometimes they are very
cooperative with the overarching strategies of the service and/
or the DOD. So we could provide a list of people from the
program manager all way up to DOD that you could look at and
make a determination.
Mr. Kucinich. I think it would be helpful to understand the
process and also to be able to begin to fix accountability from
the top all the way through the system, and the same would go
for IT, that we can find out who makes these decisions.
Now, one of the things that I think was remarkable in the
previous discussion we had, Mr. Chairman, how a person worked
for the Department of Defense in developing these--in this
faulty system, left the Department of Defense, and is now
helping Sears, from what I understand, if I understood that
correctly--helping Sears manage its financial accounting in a
way that's supposedly exemplary. Let's suppose when he worked
for the Department of Defense, he tried the same techniques.
Was he being frustrated at any place and that's what caused him
to go to the private sector? Is the system so bad that even--
that good people can't change it? And if it is so bad, what can
this Congress do to try to intervene to protect the taxpayers?
Mr. Bryce. I believe that the system in the area of
logistics has always been a bone of contention in the services,
the DOD and the outside. There are good people that work
programs and have managed to get things implemented in DOD and
in the services that are good quality, logistical products and
support applications. Not everyone is able to do that, and
that's not necessarily the fault of the system. It may be a
fault of the timing or the place of the individual.
Mr. Kucinich. You know, Mr. Chairman, I'm going to--I'm
going to have to go, but I've been involved in government for
quite a while, and I've always approached things believing that
people are essentially good, that systems are neutral, and
sometimes they don't work. It's not the people that are bad.
The systems sometimes need changing. And any of us who have
been in government have met individuals who--such as you, who
work for our government. We all work for our government.
They're good people. They want to do the right thing. There's
something wrong with the system.
So I think this question that I raised on behalf of myself
and Mr. Tierney relate to helping us get a critical analysis of
the system so that perhaps we can maybe make some
recommendations as to how we might improve the system. I have
found throughout my experience in government there's a lot of
good people who choose to work for government, and they need
support, but sometimes they need the support from the Congress
to put pressure on to change the system itself so that we don't
get into some of these horror stories that are the subject of
this particular hearing.
I want to thank the members of the panel for being here.
Thank you, Mr. Chairman.
Mr. Shays. Thank you very much, Mr. Kucinich.
Let me just understand, Mr. Sullivan and Mr. Bryce, from
both of you, and maybe from you as well, Ms. Boutelle, is the
system broken right now, Mr. Sullivan?
Mr. Sullivan. No, sir. For the purchase card, I don't
believe the online certification process that we built over the
last few years--we dealt with an existing finance and
accounting system or systems. What we did is we looked at how
we had to deal with them up front, realizing it was paper-
intensive and required a lot of data reentry. We worked with
the two banks to develop an electronic system that would
automatically interface with the finance and accounting
systems. For the most part, we did away with the paper and the
hand-jamming of all that data within those systems.
I think we've improved it drastically. Not all components
are using it 100 percent, however, and we're still working with
those.
Mr. Shays. Mr. Bryce, is the system broken?
Mr. Bryce. I believe that DOD is a very large organization
and corporation, and, yes, I do believe that some of the
systems are certainly broken. We have service parochialisms. We
have stovepipe solutions that are everywhere in DOD, and it
does take time to fix those systems. So, yes, I do believe
there are some things that are broken.
Mr. Shays. Mr. Sullivan, if the system isn't broken, then
how would you describe what's happened now? I mean, the system
is working well, the system----
Mr. Sullivan. With what the GAO found in their study of the
purchase card with the----
Mr. Shays. Right.
Mr. Sullivan [continuing]. Computer? What they looked at
was--had to do with the Navy statement, working capital fund.
The Navy has elected not to use the electronic process. We
built it for them. The banks have it. It's capable of being
used, and, as Ms. Boutelle said, that they can, if not now, in
the very near term, accept the electronic feed if the Navy
elects to use it.
The Charge Card Task Force has made a recommendation that
they use the system, or else if they have another one that can
do the same thing, to use that, but the task force also wants
them to get off of the paper and the manual reentry.
Mr. Shays. Let me understand, Ms. Boutelle; do you think
the system is broken, these two issues that we're talking
about?
Ms. Boutelle. I think the--if you look at the system----
Mr. Shays. Is your mic on? Maybe it's just too far?
Ms. Boutelle. I think it is. OK. I'm sorry.
I think if you look at DOD and all the many different
business processes that are incorporated within DOD, I think
that the answer is yes, the system is broken in many places. We
do not have integrated processes from end to end, and that is,
of course, one of the focuses of the Secretary to try to
improve the financial management and to come up with an
architecture that will work, look at our business processes,
and then figure out what we need to support those processes.
So I think it is broken, and I think that there are pieces
that are more broken than others.
Mr. Shays. In regards to the JSLIST, it takes evidently 128
processing steps to acquire control in inventory and pay for
JSLIST. Why is that, Mr. Bryce?
Mr. Bryce. I believe that you'll find most of those manual
processes down at the using unit where the rubber, so to speak,
actually meets the road, and that these individuals are
tracking JSLIST and using all manual processes, and that is
where I think you'll find the majority of those.
Now, as you start to move up that chain and you start to
use the procurement process, there are lots of manual systems
that each step uses to track themselves, or they build an XL
spreadsheet or a Windows spreadsheet or some spreadsheet to
track themselves internally, and what that creates is manual
processes. So throughout this whole JSLIST, if you followed it
all the way from the using unit back through the procurement
cycle, you would find several places and organizations that use
manual processes.
Mr. Shays. Kind of reminds me when I was a State legislator
in 1994, I ran on a pledge of having the High Ridge Road, which
is about 5 miles from the Parkway to downtown Stanford--that
the lights would be synchronized, and I was told they were
synchronized. And the lights, any time there was a lightning
storm or something, they would go out of sequence. And, you
know, 6 years later it still wasn't fixed, and we finally
learned that they were buying a mechanical system instead of
solid-state technology then--I'm going back a few years,
obviously--and the reason was was the person in charge of
purchasing lights didn't know how to work on anything that
wasn't mechanical. So the entire population was screwed by
that. But once we found that reason, you know, the change
happened, and the lights actually worked in sequence.
It's hard for me, though, to imagine why we have mechanical
systems. Tell me, what is the culture that requires that? Is it
just one person training another, and it's just what you're
familiar with?
Mr. Bryce. If I might, I could try to give you an example
in the procurement process of the JSLIST. I have identified in
my written statement that there are 24 major steps to the
process. Of those 24 steps, I have visibility of 5 that I can
track through some type of system that I have access to or
monitor or input to. That leaves 19 that I do not.
Mr. Shays. And who has control over those 19?
Mr. Bryce. Those would be all the other various agencies
within DOD, which could be DFAS, could be DLA, Department of
Defense. There are a number of organizations that are in the
chem/bio defense community, the services. Each one of those
have processes and do things that I have very little visibility
of as the Program Manager.
So that's where I believe a lot of the issues stem from in
our processes is that there's no integrated architecture. There
is no way to run this from the top to bottom. Although we have
a lot of people with good intentions, and they want to provide
oversight and guidance and help, what it ends up being is
another stovepipe solution with somebody else in charge.
Mr. Shays. Ms. Boutelle, I'm unclear, and I'm hesitant to
go here because I'm exposing my ignorance more than I want to.
I don't understand the two different charges, the manual and
the electronic, and it strikes me that it's government paying
government. I mean, this is a charge that ultimately the
government is paying to another government entity. Is that part
correct?
Ms. Boutelle. Yes, sir.
Mr. Shays. OK. But do the two charges represent actual
cost, not of that particular transaction, but of the overall,
and then you all have broken it down in this way?
Ms. Boutelle. Yes, sir. You're right on target. If you take
all of the costs for doing the process, and you allocate then
how much of the cost is--how many invoices, line items, lines
of accounting do I pay where I have to have people key the data
into the system, and then how many transactions come through
electronically, there is an allocation process that we go
through to recover our costs, and to have a person that has to
input the transactions, whether it's a contract, receiving
report, an invoice, the purchase card certified payment, that
adds to the cost that we must recover, and that is basically
the difference between the $17.36 that's manual processing and
the $6.96 that's electronic. If the transaction comes in for
the purchase card via the electronic process, it's hands-
untouched and goes through where we have to pay for the system
running, the maintenance of the system, the programmers that
keep it up, the folks who run the system, and then all of the
other processes that just happen at a bill-paying environment.
But it's basically $10 cheaper because a human is not involved
in the process.
Mr. Shays. These are transaction costs, correct? We call
them transaction costs?
Ms. Boutelle. Right. It is the way that we bill the
customers to recover our costs.
Mr. Shays. Now, dealing with you, you all are basically a
monopoly, I mean, in the sense that they can't go somewhere
else to get that service provided?
Ms. Boutelle. True.
Mr. Shays. How do we ensure that your costs are efficient
costs? In other words--and costs, when you charge someone,
ultimately--I'm asking more than one question. So we'll figure
out which one I want you to answer first, but ultimately costs,
and the higher the costs are, change behavior. So you'd think
that if you were charging someone $17 as a transaction cost,
they would have an incentive to save that money. Do they not
get--is that money something they basically can find somewhere
else so it's no skin off their back?
I mean, there are certain costs, frankly, in Congress that
are not part of my costs out of my budget, but we're well aware
of what is my budget cost, and if something is too high in some
area, and I can make the savings and then use it somewhere
else, I know it's better than something that's--you know, I
don't pay the heat in the building. I'm not charged for the
heat or the air conditioning. So I'm not--I'm not as conscious,
except I like to think I'm publicly aware that having my window
open in the summer when I have the air conditioning on is a
costly thing to do. But you get my gist?
Ms. Boutelle. I do.
I think you've asked me two questions. The first question
you've asked me is what is my incentive to drive down my costs
which will eventually be passed on to the rest of the
Department.
Mr. Shays. And then the other cost is--and Mr. Sullivan
maybe--does Mr. Sullivan end up paying this cost, or does Mr.
Bryce end up paying this cost?
Ms. Boutelle. Mr. Bryce ends up paying it for the invoices
that I pay for the JSLIST program.
Mr. Shays. So, Mr. Bryce, afterwards if you would respond.
I just want to be clear on this, as to whether you consciously
are aware that $17 is paid, and does it come out of your budget
or somewhere else? OK.
Ms. Boutelle. Sorry.
Ms. Boutelle. The--what we have done at DFAS is we have
reorganized by business lines, and we did this so that we could
put the focus more like what corporate America does. So we have
three business lines, the accounting, the military and civilian
pay and the Commercial Pay Services. So today I have all of the
bill-paying operations that report to me for DFAS.
Mr. Shays. And let me be clear on this. Do you pay--you
make sure the government has made a payment on any bill that is
commercial?
Ms. Boutelle. I pay for the--you know, there may be--
there's a few outliers out there that are still paying their
own bills that we haven't capitalized, but I disburse
approximately $156 billion through the Commercial Pay Services
to contractors and vendors annually.
Mr. Shays. So GE capital--excuse me. GE, the aircraft
engines in GE, or Pratt & Whitney is paid through you all?
Ms. Boutelle. Raytheon, Boeing, Lockheed, all of those.
Anything that is a vendor or contractor, we pay that through
the Commercial Pay.
Mr. Shays. Right. And basically we have two players in this
process here. We have one player who is actually just a certain
equipment, in this case the suits.
Ms. Boutelle. Right. Those are contracts that--for the most
part contracts that are administered by the Defense Contract
Management Agency. Those have complex payment terms and
financing agreements and----
Mr. Shays. So you're paying his bills.
Ms. Boutelle. I pay his bills.
Mr. Shays. And he gives you the vouchers for them. In some
cases he gives you the invoices. Most of them--a good chunk of
them are still manual, not electronic?
Ms. Boutelle. Actually I'm getting 74 percent of the JSLIST
invoices coming in electronically.
Mr. Shays. OK. So tell me how you figure your costs. Why
would it be basically $7, $6.96, for every transaction? And is
that competitive in the private marketplace?
Ms. Boutelle. I do not know if it is competitive in the
marketplace. It is hard for us to get benchmarking data as to
what corporate America--what their costs are.
Mr. Shays. Yeah. But----
Ms. Boutelle. We do have other payment requirements than
they have, yes.
Mr. Shays. I know Congress doesn't make your life easy, but
OK.
So define to me why you--is the 17.13 an incentive to get
them to do it electronically?
Ms. Boutelle. $17.13 is what it costs me to recover the
costs of having people pay this--pay an invoice manually, and
the cost, if they go electronically on a purchase card, is
$6.96. So rather than submit to us the paper certified----
Mr. Shays. I understand that. So you have basically figured
out both costs as accurately as can be to define actual costs.
Ms. Boutelle. Yes, sir.
Mr. Shays. And I see nodding of heads of others who were
sworn in. Thank you.
So it is--now, Mr. Bryce, tell me your incentive.
Mr. Bryce. My incentive to reduce the cost?
Mr. Shays. Yeah.
Mr. Bryce. Or to pay the bill electronically?
Mr. Shays. That 17.13 transaction cost, if you pay it, tell
me what it does to your budget.
Mr. Bryce. I have no visibility of that $17.33. I pay a
percentage of money to have the Defense Logistics Agency and
the Defense Support Center in Philadelphia administer the
contracts, which includes the DCMA, or used to include the DCMA
folks. That bill was about 6 percent of my budget is what I
paid for----
Mr. Shays. But your testimony before our committee is
basically, just like me with the air conditioning and the heat,
it's someone else that pays the bill.
Mr. Bryce. Somebody else pays the bill of which I have very
little visibility.
Mr. Shays. And it doesn't come out--and they don't then
subtract it from your budget?
Mr. Bryce. To my knowledge, that $17.33 is not subtracted
out of my budget. I pay one organization a flat fee, and how
they distribute that money, if it comes out of the defense----
Mr. Shays. So you would pay them a flat fee whether you did
it all manually or all electronically?
Mr. Bryce. That is correct, sir.
Mr. Shays. And it would be the same amount?
Mr. Bryce. Same amount, 6 percent.
Mr. Shays. OK. Mr. Sullivan, I'm--describe to me your
program. I'm sorry to our guests here that I'm going this
slowly, but I'm----
Mr. Sullivan. The electronic----
Mr. Shays. Yes.
Mr. Sullivan [continuing]. Bill paying?
When we first started in this program, we looked at how
credit card statements were being paid, and credit card
statements look identical to what you get on your personal
credit card. It's a statement which lists the merchants and the
dollars and the dates. We went out and saw individual's writing
a line entry--a line of accounting for every single thing they
were buying, and they were writing on their statement, and they
were bringing the statements together, and they were mailing
them to Defense Finance and Accounting Services for them to pay
the bill. And DFAS had to key in all that information.
Mr. Shays. And that is you, Ms. Boutelle?
Ms. Boutelle. Yes, sir.
Mr. Sullivan. What we wanted to do was take advantage of
online Internet technologies with the new GSA contract. So we
required the contractors who wanted to provide card services to
the DOD, we required them to give us a proposal for doing all
of the statement invoicing on the Internet.
Mr. Shays. So Mr. Bryce could be using the same system?
Mr. Sullivan. If they wanted to pay by purchase card, they
could. This is strictly just the purchase card process.
Mr. Shays. Right. But the point is you're providing a
service to other government agencies.
Mr. Sullivan. I provide the Internet purchase card service
to the Defense Department.
Mr. Shays. Right. Anybody--it can be--no. I got it wrong.
You want to jump in, Ms. Boutelle?
Ms. Boutelle. I think we may be confusing you, sir. The
purchase card has a certain dollar threshold. The contracts
that are for the JSLIST program are not within the rules.
Mr. Shays. These are more like small items that you would--
it would be small inventory that you might need to run your
shop, the paper, the other stuff, correct?
Mr. Bryce. That's correct.
Ms. Boutelle. Right. We charge--actually, we charge a
different rate for the invoices that we pay for the JSLIST
contracts because of the additional processes that they go
through. The rate that we're quoting to you, the $17.13 versus
the $6.96, is applicable to purchase cards.
Mr. Shays. Right. Is applicable to purchase cards. I'm
sorry. I didn't understand that. OK.
Mr. Sullivan. What we did with that was we placed the
cardholder statements online on a secure Internet site that the
cardholders could actually look at their statement as they were
purchasing throughout a billing period. So you could look at,
you know, your use of the card, or if it's been compromised,
you can find out someone else is using your card number before
you get a statement by looking at it throughout the month.
Not only can the cardholder do that, but his supervisor or
the approving official can watch what their cardholders are
using or where they're using the cards throughout the month.
Not only that, but the program officials performing the
oversight can do the same thing.
So there's a lot of internal controls that have been
strengthened by the use of that Internet technology, but
important in this particular process here is that at the end of
the month, a day after the cycle ends, rather than waiting for
mail to deliver your statement, you could look at your
statement on the Web, approve it. Your supervisor could go in
the same day, certify that statement, and then upon
certification, the bank locks that down, reformats it in an
electronic format, and sends it to DFAS, and it's automatically
loaded in the finance systems. That's done, and the bank is
paid before people even get their statements.
Mr. Shays. I'm wondering as we're talking about--I'm
thinking of my own budget, how much of it's manual, and I'm
feeling a little uncomfortable.
Before we go to have my staff ask questions here, Mr.
Bryce, I just want to be clear then. I was mixing up costs. You
submit three-quarters of yours electronically and one-quarter
manually. What are the costs associated with those
transactions?
Ms. Boutelle. The manual ones are $101.47, and the
electronic commerce ones are $84.20 for the ones that go
through MOCAS. And I think out of 85 contracts, there's 58 of
them, I believe, that are being paid through MOCAS, and then
the remaining ones are going through SAMS, which is another
system that was mentioned earlier, and the electronic rate on
that is $3.96.
Mr. Shays. OK. The first one was 101.84?
Ms. Boutelle. 101.84.
Mr. Shays. And these are big contract items that require a
lot of extra work?
Ms. Boutelle. Right. They require a lot of contract
administration and require financing.
Mr. Shays. And so the $84 electronically could be on
something that was a $2 million transaction or something?
Ms. Boutelle. Yes, and that's a per-invoice cost. So there
could be many lines of accounting on that invoice, but it would
only be $84.20 if electronic.
Mr. Shays. OK. Let me have my staff go. We'll be going a
little bit longer here. I'll have some questions after.
Just for clarification, Ms. Boutelle, you indicated and GAO
found that the Navy chose not to use the electronic process for
these purchases or for the recording of these purchases under
the Purchase Card Program. GAO also said, however, that the
Navy can accept electronic statements from the contractor under
the Computerized Accounts Payable System, the CAPS system; is
that correct?
Ms. Boutelle. The CAPS system can accept the--an electronic
purchase card transaction from US Bank. The Navy uses Citi
Direct, and we have--we had not mapped the Citi Direct
transaction into CAPS. We've gotten a cost on that. It's
$5,000. It's going to take about 2 weeks, and I've already told
the folks to go ahead and start that.
Having a Navy activity, having their accounting done at a
CAPS location is truly an anomaly. Until GAO pointed this out,
of course, we were not into the implementation yet of the
defense agencies. I truly wasn't aware that I had that
situation. So they brought it to light, and I pursued having
that mapped in. But CAPS can accept the electronic
transactions, and then the accounting system sitting at
Columbus that accounts for the defense agencies that are
handled there at Columbus, the mapping of the obligation
transaction is being worked and tested and should be
implemented here within the next few weeks.
Mr. Shays. Do you know if there are any other potential
cases out there where someone out there can accept the--what
was it, Citibank?
Ms. Boutelle. Well, and based on GAO finding this, I did go
back to my systems folks, and I asked them to get with the
banks and find out if they had anyone receiving a purchase card
statement that showed an accounting system that I would call
abnormal. We found a few that we're--and it's truly a handful,
that we're investigating to see if that's a problem with them
accepting the transaction or not. I mean, this CAPS system
today accepts a Citi Direct transaction for the Marine Corps.
It just hasn't been mapped for the Navy's line of accounting,
and that's what's different as you go through this are the
lines of accounting, and these bill-paying systems were
primarily set up to handle certain services.
Mr. Shays. OK. Mr. Bryce, when the GAO found these JSLIST
were scrapped, do you know why they were scrapped?
Mr. Bryce. From what I understand, they were scrapped due
to excess in that particular unit that they had been assigned
to or given to, issued to, whatever you want to--whatever term
you would like.
When the services get the suits, then they determine the
priority and who the suits get delivered to. Once those suits
are in the hands of the unit, it is very difficult to track
what an individual or the unit does with those suits.
And evidently we had a couple of individuals that believe
they were doing the right thing by saying these were excess
suits and turned them over to the DRMO. We believe that there
was a process that may have been missed, which is before you
turn an item into DRMO, you would normally go through and check
with an item manager within your supply chain management system
to find out if they could be redistributed somewhere within
your organization. Then if that doesn't happen, then you can
move them to DRMO.
So this has become an issue that we haven't gotten all of
the information. We don't know exactly why they did it, other
than they just thought they were excess.
Mr. Shays. Do you know how they were scrapped; in other
words, what they did with them when they scrapped them?
Mr. Bryce. No, I do not have all of that data yet. We are--
I have some people that are working the issue, and we are
attempting to make sure that, one, we can monitor the Website
for no reoccurrences, and if they do, we get them off
immediately. But more importantly, we are trying to find out
why this happened and how it happened, and I don't have that
yet.
Mr. Shays. I understand. When you do find out, could you
let the subcommittee know specifically what happened to the
suits and how they were scrapped? In other words, I'm curious
to know did they wind up in a landfill somewhere, as an
example?
Mr. Bryce. OK.
Mr. Shays. Let me just ask you a few more questions. Let me
just continue with the suit issue. We don't know for certain--
you don't know where all the suits are, correct?
Mr. Bryce. That is correct, sir.
Mr. Shays. Which is pretty astounding, but that was true
before you had that job, right?
Mr. Bryce. That's correct, sir.
Mr. Shays. OK. And you would like to know where all the
suits are?
Mr. Bryce. Yes, sir, and I--I think we have a way to do
that.
Mr. Shays. Well, but, see, this is--we were using you as an
example of a system, and we thought it was an important
product--piece of equipment. We wanted to use that and find out
what's going on. I mean, we've had previous hearings where we
had masks that simply didn't work, 40 percent of them, and yet
we were still issuing them to our military personnel.
So we've had an interest in this, and given obviously the
September 11th, we have a greater interest.
You don't, in fact, know if other places disposed of these
suits, sold them, buried them, whatever? That is also a fact.
Mr. Bryce. That is a fact. I could not tell you what any
unit after it's issued to the unit does with those suits.
Mr. Shays. And the reason is because--well, there are a lot
of reasons. One is we should still know what happens to it, but
this is designated as D mil. B. In other words, a designation
of B allows them to dispose of it if it's excess. So one simple
thing is to make sure people know that this isn't disposable,
right?
Mr. Bryce. That's correct, sir.
Mr. Shays. How many different places around the world could
they possibly be? I mean, do you have a handle on at least the
total number, or could they be in a whole host of places?
Mr. Bryce. Are you referring to where the suits would be,
sir?
Mr. Shays. Yeah.
Mr. Bryce. There are thousands of units.
Mr. Shays. OK. Fair enough.
Mr. Bryce. So it's----
Mr. Shays. All around the place.
Mr. Bryce. All around the world, thousands of units.
Mr. Shays. With you, Mr. Sullivan, what would happen if you
said all transactions have to be electronic? Ms. Boutelle, both
of you, I mean, if you were in the private sector, wouldn't the
private sector say, no manual, case closed; stay up late at
night, but solve the problem?
Mr. Sullivan. That's true. You can reduce the DFAS charges.
Not only that, but if you pay quicker, you get a large bank
rebate. So, I mean, there are incentives to do so. There are
some, you know, nonappropriated funding activities that still
use a checkbook; I mean, small--welfare and recreation
activities that will probably continue to do so. But for large
customers that process a lot of invoices, they should be paying
electronically, no doubt about it.
Mr. Shays. Why couldn't you just say that's the way it has
to be, Ms. Boutelle?
Ms. Boutelle. Well, I think that's part of the task force
and what they're looking at that Bruce is working with.
Mr. Shays. Well, no. There's a reason other than that. I
mean, the reason is we don't have--we condition--we don't have
the equipment to do it electronically, we don't have the
expertise?
Mr. Sullivan. On the user side, all you need is a computer
and access to the Internet, and you're set to go, and on the
bill-paying side, all they have to do is be able to receive it.
And for most systems, they're already mapped to accept it.
Ms. Boutelle. I can take all of the Navy's transactions----
Mr. Shays. So the problem is it's the services primarily? I
mean, they just simply----
Ms. Boutelle. They have to make that decision.
Mr. Shays. I wish we could think of a good incentive for
them.
Ms. Boutelle. I beg your pardon?
Mr. Shays. I wish we could think of a good incentive for
them. I mean, Mr. Bryce points out that he has basically
transaction costs paid by someone else. But if you had a bit
more money--actually, you don't have an incentive to have a bit
more----
Ms. Boutelle. They have two incentives. They have the lower
processing cost that DFAS charges, and they also have the one
that Mr. Sullivan just mentioned: The quicker they pay, the
larger the rebate they get from the bank, and that's quite
substantial.
Mr. Shays. Yeah, but Mr. Bryce gives me the impression in
his outfit he doesn't pay the transaction costs.
Ms. Boutelle. Again, a difference between purchase card
versus nonpurchase card.
Mr. Shays. So the nonpurchase card, they don't pay the
transaction?
Ms. Boutelle. They pay a rate that is a difference between
a manual and an electronic rate----
Mr. Shays. I understand that. I'm confusing all of us, I
guess. I thought in response to one of my questions Mr. Bryce
basically said the transaction cost is paid by someone else
other than out of his own budget.
Ms. Boutelle. It is who owns the contract, and if it's the
service that owns the contract, or if it's DLA that owns the
contract--and I'm not real sure who owns those contracts that
we pay, but that is who we charge.
Mr. Shays. OK. I'm going to just invite the other panel
to--we do have votes in 11 minutes. Is there anything that you
want to put on the record right now before I just invite the
first panel just to come and maybe make a few closing comments?
Any comment you want to make, Ms. Boutelle?
Ms. Boutelle. I do want one clarification. The Navy general
fund, for the most part they are using the purchase card
electronic process. It's just the working capital fund portion
that has not made that decision, and I didn't want to mislead
anyone that the Navy hasn't implemented it in part. It has. So
it's about what, Bruce?
Mr. Sullivan. Fifty percent.
Mr. Shays. Define the working capital fund. You said the
working capital fund is----
Ms. Boutelle. Those activities that have to recover their
costs, much like what DFAS is, that is a working capital fund.
Mr. Shays. And they would be what kinds of entities? All
throughout the----
Ms. Boutelle. Well, there's one that's out at--the bill
that GAO selected happened to be Navy supply, and they have an
organization.
Mr. Shays. I thank you for your patience. Is there anything
else you all want to put on the record?
Mr. Bryce. No, sir.
Mr. Sullivan. No, sir.
Mr. Shays. OK. I'd like to just invite the first panel just
to come. Thank you all very much. Just make some comments, if
you would. We don't have a lot of time, so I need to move real
quick here. You all are sworn in, and I just want to--we're
really discussing more than one issue here. We're discussing
inventory control, and we're talking about the purchases and
the costs and so on.
If you would, Mr. Kutz, would you just walk me through
anything that you've heard that you think needs to be clarified
since I've displayed my ignorance in fine fashion here?
Anything that you would----
Mr. Kutz. Sure. I think they gave you candid answers to the
questions you asked. The solving of the purchase card issue
would appear to be much more achievable in the short term than
the JSLIST issue. I think Mr. Sullivan was accurate in saying
that they are moving toward more of the electronic processing
of monthly credit card statements. We've seen that in the
credit card work we've been doing in the field on all of the
services, and I do believe that in the short term they should
be able to achieve the goal of having pretty much all
electronic processing of the purchase cards.
I think that the solutions to--unfortunately the more
important issue with respect to the JSLIST, chem/bio suits, I
think that the solutions to fixing that problem are much more
difficult, and I don't think that there are really any clear
answers as to how they're going to get there at the end of the
day, but that is a more important issue, and the answers to
that are much harder to get to.
Mr. Shays. When I have expenses that I submit to the person
in my office who handles this, we end up filling out and
literally typing in on a yellow sheet, you know, maybe 10--6 to
8 transactions, and then I have to sign each sheet. That is
clearly a manual transaction that we're doing in the House of
Congress. Now, I've charged on a credit card, and so there are
certain--so maybe everything on my credit card was
electronically done, one bill, submitted to us, but we then--
when we asked for reimbursement of payment to be made, we're
doing it manually. It's kind of interesting.
Any other comments you would like to make, Mr.----
Mr. Smith. The only other thing I would like to add is just
clarify working capital funds. They would be activities such as
the repair facilities in the Navy, the repair aircraft, the
ships. They fall in the category of working capital funds.
Mr. Shays. And they would be continually reimbursed in the
fund; they would put in--the money would come to their fund?
Mr. Smith. And that is what the customer would pay them,
and that is how they continually keep operating. If an overhaul
of an aircraft costs $50,000, then they would--the activity
would pay the Navy industrial fund the $50,000. Then it becomes
their working capital to keep on operating and keep on
repairing the next aircraft that was down the line.
Mr. Shays. Any other comments?
Mr. Warren. I would just reemphasize the--that the--it
seems the overriding issue is the business process and that is
really what needs to be addressed as we move forward in this
process. I think people talked about having very good systems.
There were people trapped in processes that were not working so
well, and I think that is what is happening across a lot of the
business processes with the Department of Defense, and at this
point the primary efforts to address those business processes
changes are largely siloed within the Department. And if there
was some way to get a dialog started about how you get an
integrated approach to addressing that business process change,
I think that would be--go a long way toward solving this
systemic problem that the JSLIST represents.
Mr. Shays. The incentive cost, though, what are the
incentive costs for the Department to save money, other than to
be ordered? In other words, if you're in charge of a certain
budget yourself, and you're putting a lot of manual costs, but
it's paid for by others, the transaction costs are paid for by
others?
Mr. Warren. The working capital funds, as we were talking
about, the incentive largely is not there, because the working
capital funds are paid largely through O&M expenses, and in
general the incentives are not set up within that working
capital fund process, even though that was the idea. They were
to operate as a businesslike activity, and they would have
competitive forces, but the reality is for many of those
activities, they have become monopolies in terms of--or a
single use. Their people have to go to for those services, and
so, therefore, the competitive forces can't operate.
Mr. Shays. Let me just say I have 4\1/2\ minutes to go to
the floor. That is why I'm shuffling papers as you talk. Is
there any last comment before I get on my way? If not, let me
thank you. I'm going to be a little rude and just get out of
here, but I appreciate everybody's patience with Mr. Horn
going--not returning to Congress, it's even more imperative
that others of us get caught up. So I appreciate you giving me
this opportunity.
Thank you very much, and this hearing is adjourned.
[Whereupon, at 1:11 p.m., the subcommittee was adjourned.]
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