S. Lakshminarayanan
Defence Audit Wing has vast experience in conducting reviews on various aspects of the functioning of the three Services and other allied organizations. The Audit personnel are steeped in the Services systems and procedures and are known for absorbing and understanding the nuances of their functioning and conduct audit even in the most technical areas. However the `Review of Inventory Management in Ordnance Services' (Audit Report No.7A of 2000) undertaken between Oct'99 to April 2000 opened up a new Chapter in `Value for Money Audit' in Defence Services. It set a new and refreshing pattern for reviews in Defence Audit and a similar report on Naval Stores followed within a short period.
As a trendsetter, the Inventory Management Review had several firsts to its credit. Looking back, its planning, execution and reporting effectively covered the areas, which are always considered as the very backbone of Performance Audit. Therefore a bit of reverse engineering is perhaps in order to fit in this review with the present concept of Performance Audit as a learning process.
A Consultant who was an Army officer of the rank of Lt. Gen and who had been the Director General of Ordnance Services was co-opted to provide critical inputs and guidance for the Review. It was for the first time this was done in the Defence Audit wing and both the Army Headquarters and the Ministry of Defence welcomed it. Based on Consultant's experience and our own perception of the issues involved, certain parameters were decided right at the beginning of the Review.
Need for the Review
It was decided to produce a stand alone Report on Inventory Management in Ordnance Services mainly due to the following reasons:
The multi-tiered distribution system of Ordnance holding large stocks involving over Rs. 50, 000 crores warranted a separate review and report to the Parliament.
Though several deficiencies were reported from time to time in the Audit Reports, a full system study could not be attempted because of the multifarious nature of interactions that the process of Inventory Management in the Army involved.
The report was expected to be lengthy and its conclusion in the regular Audit Report would make the same more unwieldy.
Audit Planning
The Planning Process for this review was a major challenge. It almost took one-third of the total time set for the Review. Expectedly, it paid off with good results. It was undertaken methodically with the help of the Consultant who enabled the teams to understand the entity and formulate the Audit plan. It was the experience of the Defence Audit Wing, that the inventory management in the Army side had several glitches, However it was too big an area to tackle at one go as the possibilities of sub optimisation in some areas while optimising in others could never be ruled out. An understanding of interactions between various components of inventory and sub-functions was thus necessary before attempting any holistic exercise. The guidelines of ASOSAI on Performance Auditing were kept in view while drawing up the Audit Programme.
Executive's Involvement: The cooperation of the Ministry of Defence and the Army Headquarters was essential in a Review of this nature, which was expected to cover an important area of Army's function. Letters were written to them, explaining the background under which the Review was being undertaken and the aims and objectives were clearly mentioned. To the credit of both the Ministry and Army, they issued instructions immediately down the line to extend full cooperation to Audit. Meetings were held with Director General of Ordnance (DGOS) and his officers to personally explain the Audit approach. They welcomed such a study, as they felt that their problems in material management would get highlighted at the highest level i.e. the Parliament. They nominated a nodal officer to coordinate with Audit and extended full cooperation. The Ordnance Depots and the interlinked organizations like selected Ordnance Factories, Electrical &Mechanical Engineering workshops were informed in detail in writing about the Audit objectives.
Risk Analysis: Some of the crucial areas of the planning process were collection of background material i.e. DGOS Technical manuals, previous Audit reports, internal study reports conducted by the Ordnance etc, Besides these, outcome of discussions held with various Ordnance officers at the AHQ and the selected Depots were also of immense help. With the help of all these inputs a risk analysis was conducted at the Headquarters.
Selection of Manpower: This was another important factor of the planning that involved careful selection of the team members based on their experience, past performance etc. A team of 10 officers (Sr. AOs and AAOs) further split into five sub-teams to audit one Depot each was constituted. Three Group Officers were leaders of the team. One of the Group officers in the headquarters coordinated the entire effort. The team at the Headquarters was not only to audit their concerned Depot but also to liaise with AHQ and co-ordinate with other teams under the supervision of the Headquarters Group Officer. A training Seminar lasting one whole for the Audit Teams wherein the existing policies, procedures and practices were explained in detail, emphasizing the need for a systems approach to the Review.
Audit Objectives
The review was conducted with six major objectives, which broadly aimed at the following.
To ascertain whether the current inventory management policies, practices and procedures were contemporary and cost effective
To assess whether the imperative need of the Army to remain in highest state of operational readiness is met.
Each objective was divided into sub-objectives with an indication of the source documents to be referred to and the audit steps that required to taken in achieving those particular sub-objectives. These guidelines immensely helped the teams in not losing their main objectives and adhere to their focus areas set as detailed below.
Determination of Thrust/Focus Areas
The main focus of the review was on Class B stores like spares, General Stores and Clothing maintained by the Ordnance Depots. Various types of Vehicles and ammunition were not covered, as these areas required separate studies due to their importance and financial outlay. While areas like Provision, Supply Chain Management, Inventory and Budgetary Controls, Procurement, Stock visibility, Disposal and Warehousing were covered in the Review, it was deliberately decided not to cover areas like material handling, storage and retrieval systems, space utilisation modes of transport, technical aspects of care and preservation, packing material and utilization of Depot machinery to keep the Review within manageable limits.
Based on the results of the risk analysis, financial materiality and the audit objectives fourteen thrust/focus areas were identified for the review. With a view to prevent the teams in losing the focus areas during the course of Audit, a conscious decision was taken to make a note of any important information noted on other aspect not concerned in the review for separate examination by other teams. For the purpose of data collection, the teams were supplied with pre-printed data collection Forms with an indication of Audit Criteria, Source documents to be referred to, wherever possible.
Audit Execution
This process that commenced with an entry meeting with the DGOS and other senior functionaries of the Ordnance at the AHQ lasted little over six months. During the course of Audit execution, the teams had the advantage of constant interaction with the Consultant and amongst themselves during the Workshops held at the Headquarters.
Evidence collection: The methodology employed in ensuring that the Review would reflect the actual ground realities called for detailed collection of material on all the eight main Depots which maintain the inventory. Based on this, five were selected for Review as these held 83% of tonnage and 93% of value of the inventory. Even then the work was enormous so it was further refined by done by selecting' Focus Areas' in each of these Depots. They mainly covered areas like user satisfaction, stock visibility, procurement etc. The evidence collection process involved random sampling (owing to the volume of transactions to be studied and absence of a computerized database), data collection, analysis of evidence gathered against the standards (audit criteria) initially set and validation of findings. Teams were directed to be particularly painstaking over selection of samples to exclude any bias and it is to their credit that they overcame their natural propensity for highlighting only the failures; a long established practice in the normal audit As there were instructions covering provisioning, stocking, ordering, issuing and disposal, the road map for Audit was clear. Main problem was one of data collection for specific areas and its interpretation.
Monitoring and Co-ordination: Workshops were held periodically with all the parties, after the first round of audit, to gauge how far our approach was yielding the result we expected. Was a course correction needed? Were some aspects to be eliminated and some other added based on field experience? Is there a difficulty in getting the data? Are all the parties on the same wavelength? These questions were discussed and the approach was further refined. Supervision of the parties by Team leader and the Consultant was close. Interactions were practically on day-to-day basis. Slowly a picture emerged mainly due to the efforts of the field parties who were interacting at all levels with the auditee at every stage of audit. Efforts were made to understand the genuine problems faced by the Depots. Deficiencies in systems and procedural bottlenecks were reflected in monetary terms wherever possible.
Bench Marking and Reporting
On examination of contemporary practices followed by the Ordnance Services of other countries and certain well established techniques used in the commercial world for better Inventory Management, attempted to assess the current practices/procedures against the best practices followed world wide, wherever possible. The Reporting process broadly involved analysis of the evidence gathered and discussion with field level entities and framing of observations and recommendations.
Constraints
Data collection /extraction, analyses, and reporting involving 4.2 lakh items was a formidable task. Due to manual system of data maintenance, its retrieval and perusal was a daunting task and hence representative samples were only checked.
MIS was not fully reliable due to discrepancies in reporting system but in the absence of any other material this was adopted in the Report wherever necessary.
Discussion with field level Entity
The audit parties crosschecked the data collected by the teams at the time of the visit to the Depots. The Audit parties met the Heads of the Depots and discussed with them in detail the Audit approach and also stressed the time factor in replying to Audit queries. In every Depot, a coordinating officer was nominated to ensure prompt response to Audit. Issues affecting the functioning of the Depots were discussed in detail. The Team leader and the Consultant were fully involved in all these processes. During the Audit, due to clear understanding of the needs of Audit, there was free and frank exchange of views. All statements and material relevant to the Review were crosschecked with the records and documents available in the Depots and Army Headquarters.
Focused approach
Each component of the Review was designed to bring out specific areas of systemic lapses and each of the sub-components was selected and material collected to establish this overall Audit objective. Samples were selected at random to establish a conclusion. Written replies to Audit queries, data collected in prescribed format and crosschecked, selected correspondence between the Depots and higher echelons, files of the Army Headquarters formed the basis for Audit findings. The Audit queries themselves were based on various instructions, prescribed scales, prescribed time limits for an operation, internal studies and its recommendations etc. These were then collated, analysed for each topic and then discussed with the parties in another workshop. Once the chapters took shape it was necessary to draw up credible recommendations based on the facts that emerged and the discussions with various echelons of the Army.
Exit meeting with Executive
Preliminary Audit findings along with the Recommendations were drawn up and sent to Ministry of Defence, Army Headquarters and Defence (Finance) for their comments and reply. In addition the report was also discussed with the DGOS and his officers as Head of the Organisation that had been reviewed.
Executives Response
Response received indicated that out of 68 recommendations the Ministry and the Army agreed fully agreed with 51.The Report was then drawn up not only indicating the Audit findings but also its Recommendations and areas of concern that emerged during Audit.
Lay out of the Final Report
The Preface of the Audit Report incorporated the essence of Audit approach, its findings and its impact if implemented. The areas of Recommendations and how it would result in significant payoffs were clearly brought out in the `Preface'. There were 13 Chapters, each dealt with a specific focus area. Each Chapter of the Report was drafted in a structured manner indicating the Title, Summary, Introduction, Audit Criteria (System implementation requirement), Audit Observations, Impact Recommendations, Executive's Response, and Conclusion. The data in the report were illustrated with Graphs and Flow Charts to improve the visibility of the analysis and findings. As the report was technical in nature a separate `List of Abbreviations `and `Glossary of Terms ` were added to enable the reader to understand the terminologies used. The organization chart of Ordnance and a flow chart on provision review was incorporated to enable the reader to understand the intricate system of inventory management. The entire process of finalizing this report had incorporated most of the theoretical aspects of Performance Audit in its planning, execution and reporting.
Follow up and Approval
Discussion with Army Headquarters, drafting the report after receipt of replies, rejoinders and further replies etc took more than 6 months and finally the report was approved by the CAG in Dec'2000 and was laid on the table of the House in the same month.
Impact
It was gratifying for the Defence Audit Wing and all the Teams involved in its preparation that the Report was widely acclaimed and extensively quoted as a Path breaking Effort which contributed not only to the effectiveness of Inventory management in the Army but also added a measure of professional competence and confidence to the Defence Audit wing.
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The following officials were involved in this Review:S/Shri.Sadu Israel, S.K.Jaipuria, Bagchi as Team Leaders and D.N.Pant, S.Hariharan, Kalyanaraman, T.N.Gopinathan, S.A.Khan, M.I.Naseem (Sr.AO's and AO's) and R.S.Singh, J.G.Ingle, M.R.Rehman, A.H.Mansoori (AAO's). The Consultant was Lt.Gen.D.V.Kalra PVSM, AVSM (retd)