During field visits, it was noted that many procuring offices at the field level are unsure of their authority to develop procedures to simplify operations and provide more effective support. There is a reluctance, especially in small field offices, to deviate from established procedures or to submit requests through channels for authorization to use innovative techniques. Agency staff visits should identify areas needing on-the-job training and support development of solutions to specific field needs. Mobile cadres would provide a means of implementing proven techniques and would alert the agency head to operational needs. This practice is used effectively by the Navy in training to improve troop feeding operations on board ship and at isolated locations.

Conclusions

Various procurement techniques are available for use by agencies in acquiring supplies and services.

By increasing the ceiling for small purchases to $10,000, the Government will achieve substantial administrative savings.

Agency solicitation and contracting practices contribute to the bulk and complexity of bid packages and contracts.

Requirements contracts designed to provide total supply support for a function can potentially reduce the number of individual actions and improve work-force productivity through more responsive delivery.

Wide variations in station-level procedures and the resulting differences in operational costs can be attributed to differences in procurement authority, organization, and personnel qualifications at the station level.

The professionalism and organizational placement of the procurement staff and the extent to which it is used at the agency level are of primary importance in considering and selecting among alternative methods of procurement and distribution.

Increased professionalism at station level requires a dynamic agency program for onthe-job training and development of skills among procurement personnel.

SUPPLY DISTRIBUTION SYSTEMS AND ALTERNATIVES

The commercial products covered by this discussion are those that are commonly stored and issued by a Government distribution system. The acquisition and distribution of specialpurpose equipment is not addressed in this section except for leasing or rental of such equipment as an alternative in filling specific requirements.

Recommendation 6. Provide statutory authority and assign to the Office of Federal Procurement Policy responsibility for policies to achieve greater economy in the procurement, storage, and distribution of commercial products used by Federal agencies. Until statutory authority is provided and until such responsibility is assigned to the Office of Federal Procurement Policy, the following actions should be taken:

(a) Establish reasonable standards to permit local using installations to buy directly from commercial sources if lower total economic costs to the Government can be achieved. However, decentralization of items for local purchase should not be permitted to affect adversely centralized procurement and distribution management required for purposes such as mobilization planning, military readiness, and product quality assurance.

(b) Develop and implement on an orderly basis industrial funding of activities engaged in interagency supply support of commercial products and services, to the fullest practical extent, so that (1) determination and recoupment of the true costs for providing such products and services will be facilitated, and (2) efficiency in the use of resources will be fostered.

(c) Evaluate continuously the efficiency, economy, and appropriateness of the procurement and distribution systems on a total economic cost basis at all levels, without prejudice to mobilization reserve and other national requirements.

A procurement action generally begins with a purchase request that identifies the requirement and the point of delivery. In acting on the request, attention too often is focused on

the price of the item requested rather than on the total cost incurred by the Government, including a share of the cost of the distribution system involved.

Delivery of products to the user entails the use of a Government or a commercial distribution system, or a combination of both. In nearly every case, delivery accounts for a large part of the total cost of an item at the point of use. Distribution costs should be evaluated in relation to the purchase-price savings and other benefits of Government distribution.

At the point the Government takes title to property, it generally assumes all responsibility for loss, damage, deterioration, obsolescence, excesses, and all costs of handling, warehousing, and distribution. Commercial distribution provides a means of acquiring delivery services with a corresponding reduction in assumption of risks and delivery costs. The evaluation of alternative distribution systems should be based on comparative delivered or landed costs to the user.

Figure 2 shows the levels of support now used in relation to the user. At each level of

support both stock and nonstock alternatives are available. Requirements are filled from depot or warehouse stocks or are ordered from suppliers for direct delivery to the user.

Although the unit price of an item tends to decrease as requirements are consolidated and better volume discounts are obtained, the cost of operations of large and more complex levels of support tends to increase the cost. Regardless of the level of support used, there is a true or "landed cost" to the Government at the point of use.

Many activities believe that Government warehousing at or near the local station is essential for adequate support. This is not always true. The stock level at the station depends on the criticality of the potential need, the leadtime for replenishment, and the physical characteristics of the product. One alternative to local stock is direct delivery from commercial

sources.

The most obvious cost factors at the station level affected by the distribution system include: • Administrative costs in processing requisitions, purchases, receipts, and payments

• Work-force productivity losses due to nonavailability of material

• Pickup, warehousing, and distribution costs, including investment capital in stock • Disposal of excess property generated due to various ordering and operational factors.

Agency-level warehousing and distribution systems vary from those agencies that do not have any to those that have extensive systems. Some systems duplicate the warehousing of interagency, station-level, and commercial systems.18 Even among DOD activities there are vast differences in policy, logistics organizations, and support systems at the agency level.

The variation in the methods used to provide users with commercial products has a significant impact on the economy and effectiveness of this support. Landed-cost studies outlined in Chapter 6 indicate that the lack of consideration of total system cost is the main reason for not moving to less costly methods of supply support.

18 U.S. Comptroller General, Report B-146828, Savings Available to the Government Through Elimination of Duplicate Inventories, May 1968, pp. 5-7.

The Veterans Administration (VA) is one agency that operates its support system on the basis of total cost. The VA operates 237 field activities including the largest hospital system in the Nation consisting of 166 hospitals with more than 102,000 beds. The Marketing Center in Hines, Illinois, is the agency's central commodity-management point. Contracts for depot stock, direct delivery, and indefinite delivery contracts for station delivery are made at this point.

Comments on VA station-level procurement from agency users are reviewed for consideration of supply alternatives, including consolidation of orders against existing contracts to take advantage of quantity discounts. Only 1,968 items (27 of which are nonexpendable equipment) are centrally stocked. Careful selection of items for depot stock on a total cost basis has reduced VA depot costs to about 16 percent of item cost. This cost is far below that of all other activities studied.19 Figure 3 shows the sources and methods used by the VA to provide total requirements to hospitals and the ratio of these levels of support.

Interagency-level Support

FSS and GSA interagency support activities were developed to provide greater economy and efficiency by reducing duplication, consolidating requirements, standardizing product lines, and optimizing technical capability. These objectives are valid and have been achieved for a great many items, but it is difficult to evaluate the overall results. These agencies cite many examples of favorable prices obtained through the use of definitive specifications and quantity purchases. However, net savings to the Government through standardization actions cannot be determined unless all costs associated with the transactions considered.

A review of GAO reports for the past ten years reveals perpetual problems in stocking and managing thousands of commercial products of low dollar value and very little de

19 See Chapter 6.

sures a predictable level of activity, there is a lack of visibility and incentive for total costeffectiveness. If interagency stockage policy were based on cost considerations and agency use of the stock were more flexible, the uneconomically managed items could be identified and those not required for special reasons could be deleted from the system.

Figure 4 shows the stratification of items managed by DSA in relation to the annual value of item demand. Of the items managed, 86.3 percent have an annual turnover of less than $400. In 1963 GAO estimated that each item managed in a depot cost $114 and that the savings obtained by central procurement of items with an annual demand of $400 and under were usually less than the cost of managing

the item.21 The depot cost of managing an item is probably even higher today.

Financing of Interagency Depot Operations

Except for stock-fund operations, FSS and DSA are financed by direct appropriations. The amount charged for items covers the purchase price plus a small surcharge for transportation. The surcharge for FSS is 81/2 percent; for DSA it ranges from 21/2 to

21 U.S. Comptroller General, Report B-146828, Uneconomical Management of Commercially Available Items, Nov. 29, 1963, p.10.

16 percent depending on the product line.22 The current surcharge policy is based on legislation that resulted from recommendations of the First Hoover Commission.

Conditions today are very different from those prevalent in 1949. New techniques such as functional support contracts are being used by operating agencies. Industry has further developed an extensive commercial distribution system. Despite standardization efforts, miscellaneous Government requirements for items in common commercial use have proliferated.

The cost of services provided by wholesale procurement and distribution systems should be determined and appropriately prorated to each product line as a surcharge. Interagency activities could then be financed by industrial funding rather than by annual direct appropriations. Industrial funding enables an activity to finance the cost of doing business by applying a markup computed on the basis of the value added by its operation. With this total cost visibility, the optimum method and location for purchase of Government needs could be identified easily.

Industrial funding of interagency support activities can be achieved without legislation except for the GSA Federal Supply Service. In establishing GSA, the Federal Property and Administrative Services Act 23 specifically expressed the method by which the FSS operation was to be funded.

The National Supply System

The services provided by FSS and DSA in the procurement and distribution of commercial products to Government activities are sometimes referred to as the National Supply System. These services are virtually identical except for products, and there is even some duplication in the items carried. DSA performs some services for defense agencies in developing products (food and textiles) and in provisioning military supply requirements. The FSS operation includes the Federal Supply

22 Briefings of Study Group 13A (Commercial Products) by General Services Administration, Mar. 26, 1971, and Defense Supply Agency, May 23, 1971.

23 63 Stat. 379, 40 U.S.C. 751, 756 (1970).

Schedule system of call contracts for use by all agencies. Both activities are capable of accepting automated requisitions, with the DSA operation being an integral part of the DOD cataloging and military standard requisitioning system.

Both FSS and DSA maintain depots throughout the United States. The FSS depot system provides regional coverage for commonly used items; special product requirements are distributed on a depot-assignment basis. The DSA depot system is established on a product-line basis without regional coverage. The DSA depots and their locations are the result of a consolidation of military depots previously operated by the individual services. The DSA commercial operations are essentially single management of items used by two or more defense activities with some support also provided to civilian agencies by agreement with GSA. The FSS operation is primarily single management of requirements common to all Federal agencies.

Industrial funding of GSA and FSS operations would identify low-dollar, low-demand, commercially available items that can be procured more economically and distributed by alternative means. This would result in specialization in products and services that can be provided effectively through a central purchase and distribution system. It would include user needs that cannot be economically stocked but for which there is a requirement for mobilization or other purposes. Industrial funding of commercial product support furnished by interagency activities would also identify special needs and permit financing them by the agencies requiring the special services.

If industrial funding were established for FSS and DSA, the resulting combined effort would be essentially a Government wholesale operation. As such it should be organized to be as effective as possible on a total-cost basis. The Commission considered the establishment of a single commercial-type operation, such as a Federal supply corporation, but did not analyze the feasibility of such a corporate structure in sufficient depth to make a recommendation. Nevertheless, the possibility should be considered after industrial funding has been implemented and evaluated.