1. Office of the Under Secretary of Defense (Comptroller) Physical Inventory Best Practices 1 Briefing for Joint Physical Inventory Working Group September 28, 2010

2. Best Practices in Physical Inventory Counting Procedures Purpose/Objectives Scope and Methodology Observations Recommendations

3. 3 Purpose/Objectives Point of View paper developed by FIAR (July 2010) to help address the following question: – Given the Department’s complexity and unique assets, is its current inventory guidance sufficient to address its challenges in achieving consistent, accurate physical counts of its assets? Objectives: – Evaluate the Department’s current physical inventory counting procedures against industry best practices used by private sector companies identified by the Government Accountability Office (GAO) as excelling in their ability to manage inventory and achieve accurate physical counts of inventories – Provide recommendations to improve existing guidance to ensure effective and efficient inventory counting procedures that will contribute to the accuracy and reliability of inventory data 3

4. Scope and Methodology GAO Executive Guide: Best Practices in Achieving Consistent, Accurate, Physical Counts of Inventory and Related Property (GAO-02-447G) – Intended to assist Federal agencies in achieving objectives of CFO Act of 1990 – Studied the inventory processes and procedures of several leading edge companies – Identified 12 key factors in achieving consistent and accurate physical counts DoD FMR, Volume 4, Chapters 4 & 6 – Prescribes the Department’s accounting policy and requirements related to inventory and OM&S (Chapter 4) and PP&E, including real property and general PP&E (Chapter 6) DoD 4140.1R, Supply Chain Materiel Management Regulation – Establishes requirements and procedures for DoD materiel managers and others who work within or with the DoD supply system DoD 4000.25-M, Defense Logistics Management System – Prescribes logistics management policy, responsibilities, procedures, rules and electronic data communication standards for use in the Department 4

5. Scope and Methodology (con’t) DoD 4000.25-2-M, Military Standard Transaction Reporting and Accounting Procedures (MILSTRAP) – Prescribes procedures for recording inventory management data between elements of a distribution system within a DoD Component or between various systems within the Department DoD 5100.76-M, Physical Security of Sensitive Conventional Arms, Ammunitions, and Explosives – Prescribes minimum standards and criteria for the physical security of DoD sensitive conventional arms, ammunition, and explosives Note: Inventory of nuclear weapons not included in scope – Refer to Joint Publications 6, Volume II, Joint Reports: part 4, Nuclear Weapons Reports; section 5, Stockpile Inventories and Inventory Records 5

6. Observations Based on comparison, scored either “Met” or “Partially Met” in 10 of 12 Key Factors (83.3%) Did not note any specific written guidance related to either Supervision or the performance of Blind Counts (“Not Met”) General observation: Sample counting should be used only when the following has been demonstrated: – Proven track record of very accurate inventory counts; and – Strong internal control environment 6

7. Recommendations Update existing Department guidance where appropriate to include all key factors cited in GAO Executive Guide – Consider using Appendix I of the Guide as an aid in developing more prescriptive guidance for each phase of the count process – Planning, Conducting, Researching, and Evaluating Compare Department policies against applicable accounting and auditing standards to ensure proper alignment Establish minimum frequency requirements for routine review of key policies and procedures Insert a matrix in DoD FMR which points to the various sources of Department guidance relating to inventory 7