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

Financing of Interagency Depot Operations

ures a predictable level of activity, there is a ack of visibility and incentive for total cost!ffectiveness. If interagency stockage policy vere based on cost considerations and agency ise of the stock were more flexible, the unconomically managed items could be identified ind those not required for special reasons could De deleted from the system.

Figure 4 shows the stratification of items nanaged 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 nanaged 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

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 2 1/2 to

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

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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.

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.

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).

Alternatives

Various types of service contracts are used throughout the Government to fulfill the needs of an agency or user. They include contracts for technical service, housekeeping, and maintenance or operation of equipment and facilities. Service contracts frequently eliminate the need for separate procurement of related supplies. For example, a contract for complete janitorial services eliminates the need for Government procurement of janitorial supplies.

Service contracts can be written to provide for Government-furnished supplies or for the contractor to provide all or a part of the supply requirements. Decisions regarding the type of items to be furnished by the Government should be based on cost, availability, and responsibility for the end result. Obviously the total cost of supplies in the Government distribution system should be known in order to make effective decisions on the items of supply that will be furnished by the Government and those the contractor can furnish most economically.

Despite widespread use of service contracts throughout the Government, there is a lack of orderly consideration of alternatives. This is caused by limitations in the use of funds, mandatory sources of supply and service, and inadequate consideration of the real costs of the method used.

The number and complexity of problems in service contracting reported by using activities and industry were relatively small in comparison to those surrounding purchasing and maintaining supplies and equipment. The flexibility provided in the FPR and ASPR enables the agencies to resolve their problems internally. This adaptability is attributable to the need for having the contracting accomplished as close as possible to the place of performance. The only problems brought to the attention of the Commission by the field activities were mandatory use of regionwide service contracts that precluded field activities from obtaining better terms for their own requirements. Many of the areawide service contracts also are on a time and material basis which requires additional field activity effort to account for the services and supplies involved.

Leasing is sometimes an economical alter

native to outright purchase of equipment. Leasing is used extensively in the acquisition of computer capability, but the potential for savings via lease of heavy equipment and tools for short-term use has not been realized. In the construction equipment field, for example, operators obtain the lowest cost per equipment hour by renting or leasing the newest, most modern equipment from a local distributor for a short duration (time of need). Additional factors favoring leasing include:

• Parts and repair remain the responsibility of the local distributor. • Equipment need not be moved long distances from one jobsite to another at great expense. • The newest, most modern piece of equipment, designed to do specific jobs, is always available. The Government is not forced to use obsolete, oversized, or undersized equipment on projects because it is in stock. • Local distributors maintain servicing facilities with trained specialists. • Government funds normally earmarked for equipment purchase can be used for other purposes.

Conclusions

The choice of distribution systems or combinations of systems has a direct effect on the economy and efficiency of fulfilling user requirements.

Total costs are not considered in the establishment and operation of Government distribution systems and alternatives.

Industrial funding of interagency support activities would provide the cost visibility needed to optimize selection of procurement and distribution methods.

Service contracts and leasing offer substantial advantages in satisfying particular user requirements.

OVERSEAS SUPPORT SYSTEMS

Review of the economy and efficiency in all purchases of foreign-made products of $500 or more.

Facility maintenance and housekeeping services are procured at many overseas locations. Functions that may be included in these contracts are operation, maintenance, and repair of base or engineer facilities, food services operations, motor pool and motor vehicle maintenance, generator overhaul, operation of laundry and dry cleaning plants, and office machine repair. These contracts involve a large amount of funds and play a vital role in support of overseas installations. Primary factors that determine whether these services will be performed in-house or by contract are economic considerations and Government-toGovernment agreements. For example, basemaintenance contracts for support of two U.S. Air Force bases in Greenland are awarded to Danish firms by the U.S. Air Force Europe (USAFE) Procurement Office, Copenhagen, Denmark. These contracts are based in part on economic factors and in part on Government-to-Government agreements.26

supporting Federal activities located overseas is of extreme importance in view of the scope of requirements, balance of payments, and other national objectives.

Recommendation 7. Require that consideration be given to the direct procurement of products made in the United States from sources available to overseas activities when such sources are cost-effective.

In fiscal 1972, DOD spent $2 billion for supplies and services outside the United States.24 Since DOD is the largest Government buyer and user of commercial products overseas, this section primarily deals with its procurement support systems and the Air Force Buy U.S. Here (BUSH) contract program that is available overseas to all Federal agencies.

Government activities overseas obtain or procure commercial products from a number of sources. The major sources are DSA and FSS. Each military department also operates a worldwide logistics network to provide supplies and services to its overseas units. They also have a number of overseas purchasing offices that provide direct support to the agency and other overseas Government activities. These offices range in size and dollar volume from a small office in an embassy, to a Navy ship operating in foreign waters, to large military buying centers in the Pacific or European Theater. Almost all military bases have local procurement offices which buy products and services in a similar manner to those in the continental United States.

Primary differences in procedures relate to consideration of Status of Force Agreements between the United States and host countries, customs requirements, and special operational considerations (such as differences in electric power and use of the metric system). Maintenance requirements for host country acquired facilities and equipment necessitate procurement of foreign-made parts and material. All overseas procurement is negotiated,25 and small purchase procedures generally are used up to $5,000. The most restrictive requirement in overseas procurement is the need for a balance-of-payments determination on

DOD Overseas Direct Delivery Contract Program

The U.S. Air Force operates the BUSH program for commercial products used by DOD and other Government activities overseas. Negotiation techniques used in this program were previously discussed under Indefinite Delivery and Indefinite Quantity Contracts. The program is intended to increase purchase by overseas activities of products made in the United States, thereby improving the U.S. international balance of payments (gold flow). Availability of contracts for U.S.-made items makes the use of these items preferable to the purchase of foreign-made items. Whenever possible, the contracts provide for payment to the parent U.S. company to minimize balance of payments loss.

Basic criteria for BUSH contracts are purchase of products from U.S. companies that have overseas distribution systems, or from

24 Military Prime Contract Awards, July 1971-June 1972. p. 44. (Figure rounded by the Commission.)

25 10 U.S.C. 2304(a) (6) (1970).

28 U.S. Air Force, Europe, Director of Procurement and Production, Europe Procurement Brochure, Oct. 1, 1966.

shipment of these items by the U.S. Government from the United States.

Indefinite delivery contracts can be used to simplify procurement of U.S.-made products from overseas sources.

Overseas activities should not be required to order material from the United States without consideration of alternatives that may be more cost-effective.

GRANTEE USE OF FEDERAL SUPPLY SOURCES

their distributors or subsidiaries, at lower costs and with faster overseas deliveries than would be obtained if the Government purchased similar goods in the United States and shipped them overseas. These indefinite delivery contracts provide for the delivery of only U.S.-made products at fixed prices for a period of time, usually a year. The contractor is then authorized to publish multiple copies of the BUSH “Authorized Price List” (APL) that contains all required Government ordering information plus delivered prices and technical data. This materially assists individual activities in identifying and ordering their specific needs. Overseas BUSH contractors provide warranties and service on the products they furnish. Warranty and maintenance service without return of equipment to the United States is an important cost factor.

All overseas U.S. Government agencies and their nonappropriated fund activities may order from a BUSH contractor's APL. Government contractors performing on costreimbursement contracts overseas are also authorized to use BUSH contracts. In its APL, the BUSH contractor may offer its complete commercial product line of U.S.-made goods.

Except for emergencies, DOD restricts use of BUSH contracts to items not centrally managed and stocked in the Government distribution system. Reluctance to change supply source coding in automated systems used to support overseas activities generally precludes consideration of local BUSH contract alternatives. A recent study of BUSH contract use 27 indicated that savings to the Government of from 17.3 percent to 27.9 percent of the purchase price for a select group of items would have been achieved by using the BUSH contracts in lieu of requisitioning the same item from U.S. depots.

Prior to November 14, 1972, agencies were authorized to allow their grantees to use Federal sources of supply and services under Federal Property Management Regulations (FPMR). This practice has been discontinued by a GSA amendment to the FPMR.28 Use of these sources by Federal grantees was opposed by potential commercial suppliers and was troublesome to many levels of Government. Notwithstanding the recent action taken to discontinue grantee use of Federal sources of supply and services, the Commission makes the following recommendations:*

Recommendation 8. Authorize primary grantees use of Federal sources of supply and services when: (a) The purpose is to support a specific grant program for which Federal financing exceeds 60 percent, (b) The use is optional on the grantee, the Government source, and, in the case of Federal schedules or other indefinite delivery contracts, on the supplying contractor, and (c) The Government is reimbursed all costs. Recommendation 9. Require that grantor agencies establish regulatory procedures for assuring appropriate use of the products or services and computation of total costs for Government reimbursement. Recommendation 10. Assign responsibility for monitoring implementation of this pro

Conclusions

Purchase of U.S.-made commercial products by overseas activities from U.S. firms or subsidiaries with overseas distribution systems provides a potential for savings over

28 FPMR, ch. 101, as amended in Federal Register, Nov. 14, 1972, p. 24113.

*See Dissenting Position, infra.

Commissioner Sampson abstained from voting on these recommendations.

21 U.S. Air Force, Data Systems Design Center, 1971 Study, Gunter AFB, Alabama.

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