Page images
PDF
EPUB
[blocks in formation]

of support provided. This was done to estimate the costs of major types of programs and to avoid aggregating types of support that have different cost characteristics. Although we were able to define meaningful programs, certain minor distinctions in programs could not be made due to lack of data.*

Appropriated fund data were taken from DSA and FSS accounting systems. Data on VA interagency support activities were obtained from its revolving supply fund records. Costs of support programs were obtained from accounting records and other data furnished by the agencies, or were derived by the Commission in the course of its analyses.

All appropriated fund costs were allocated either to a support program or to "other" activities. Overhead and headquarters costs were allocated to activities at several levels.

For DSA, the major "other" activities were the Defense Contract Administration Services, the Defense Logistics Services Center, the Defense Industrial Plant and Equipment Center, and services provided by DSA centers, depots, and headquarters for Federal agencies.

For FSS, the major "other" activities were the Office of Automated Data Management Services, Federal Supply Schedule Program, GSA business service centers, procurement regulation activities, and certain specification and standards activities.

The result is summarized in table 2.

As can be seen from the funds allocated to "other" activities, an effort was made to segregate activities not directly related to the sup

4 For example, the inclusion of direct vendor delivery of stocked items in the stock support programs analyzed tends to reduce the cost shown for the stock support program by attributing storage costs to a greater quantity of items than were actually stored.

TABLE 2. APPROPRIATED FUND EXPENSE OF
INTERAGENCY SUPPORT ACTIVITIES

Total

(Thousands of dollars)

[blocks in formation]
[blocks in formation]

290,070

18,007

2,931

[blocks in formation]

Source: Study Group 13A Final Report, vol. II, part VII, ch. 2, exhibit VII-2-7, pp. 705-709. •Total costs of each activity include allocation of DSA headquarters expenses.

361,312

76,141

port programs being analyzed. Costs arising from an activity's compliance with legal and regulatory restraints, socioeconomic programs, and other requirements were treated as normal costs of doing business.

Revolving stock fund costs were obtained from annual financial statements. Adjustments were made to eliminate general and administrative costs not applicable to interagency support.

Costs not included in any accounting record were primarily return on invested capital and depreciation. Values for real and personal property were obtained from agencies on a best estimate basis. The allocated costs of inventory, cash, and accounts receivable were obtained from stock fund financial statements. We could not compute all costs that might be relevant. If thought to be significant, categories of missing costs were identified."

[blocks in formation]

Obsolescence Costs

In this report, the term "obsolescence costs" includes the cost of items removed from inventory as excess to current and projected needs. This condition may be due to technological obsolescence, overprocurement, or reduced usage. These costs may arise for any number of reasons, such as the need to maintain military readiness.

Obsolescence costs are significant and were particularly high in fiscal 1971 because routine property disposal operations had been suspended during fiscal years 1966-1969 due to the Vietnamese conflict. These costs can be deferred and are not accounted for until disposal action is taken.

Obsolescence in relation to regular operations at the Defense Construction Supply Center (DCSC) illustrates this problem. The DCSC inventory investment, sales, deliveries, and obsolescence measures are shown in table 3.

From table 3 it can be seen that:

• Total DCSC inventories at the beginning of fiscal 1971 were $481 million. This includes

For example, the cost of storage facilities provided to DSA by the military services other than those integrated into DSA'8 regular storage programs; the cost of Government disbursement not borne by the activity itself.

as directed by DCSC

Source: Defense Stock Fund Report, Construction Supplies Category, June 30, 1971 and data furnished by DSA which showed using activities had requested permission to return goods valued at $204 million, excluding automatic returns. Of this, $103 million was authorized for return, leaving a residual of $101 million for disposal by the using activities.

Obsolete inventory is probably an unavoidable cost of supporting changing customer programs. However, inventory managers tend to base their forecasts of future needs and plan inventories on movement from inventory rather than on current customer usage. Stocks and pipelines can be full on the day equipment is removed from service. This is particularly true where supplies to meet repair needs increase with the age of the equipment.

Because of the high cost of obsolescence and the inability to predict its occurrence, we costed DSA operations using four different measures of obsolescence cost as reflected in inventory and accounting adjustments."

All four measures are shown in Appendix F for DSA but only "with obsolescence" and "without obsolescence" are shown in table 5 of this chapter. The four measures are:

Estimated economic losses reflected in stock fund cost accounts for fiscal 1971 indicate the cost of inventory disposed of or the cost to put it in saleable condition. Changes in value of inventory also were included in this measure. Highest costs generally are found in this category ("with obsolescence").

Surcharge costs for inventory losses for fiscal 1971 as reflected in the DSA surcharge policy. These are accounting charges that are to be recovered by the surcharge income. They primarily reflect charges and credits associated with keeping the stock fund financially healthy as opposed to measuring obsolescence directly. Surcharge income for fiscal 1971 which reflects DSA's long-run view of average inventory loss.

No cost for inventory losses was considered as the final alternative ("without obsolescence").

TABLE 4. INTERAGENCY DEPOT STOCK SUPPORT PROGRAMS,
ESTIMATED COST AS A PERCENTAGE OF SALES*

[blocks in formation]

TABLE 5. INTERAGENCY DEPOT STOCK SUPPORT PROGRAMS,
ESTIMATED COST PER $100 PROCURED AND SOLD*

29.92%

16.30%

63.78%

55.73%

[blocks in formation]

Interagency Depot Stock Support Programs

The total cost of the depot stock support programs analyzed is shown in table 4.

The average estimated cost of purchasing and distributing $100 worth of stock in depot programs of the three agencies was $55.73. The total estimated cost of these interagency depot stock support programs is well over $1 billion annually.

Table 5 summarizes the results of the cost analysis for the individual stock programs. The following observations can be made from these cost comparisons:

The cost per $100 sold is lower than the cost per $100 procured when an agency is

reducing stock levels because the cost of operation is charged to a larger base."

• Stock support is expensive, ranging from $16.30 to $92.38 per $100 sold when obsolescence costs are included.8

VA costs are the lowest of the activities shown. We attribute this to the VA's restrictive criteria for stockage that exclude items with poor economic characteristics so that volume and turnover per item are higher and to the type of products and limited product lines (food, drugs, and medical supplies) for

Fiscal 1971 was a year of declining activity after the Vietnam build-up and inventories were being reduced.

• When measured against procurement, several DSA activities show annual costs in excess of the value of procurement for fiscal 1971 (DCSC, DESC, DGSC, and DISC).

TABLE 6. INTERAGENCY NONSTOCK SUPPORT PROGRAMS, ESTIMATED COST PER $100 PROCURED

[blocks in formation]

which the stock support is provided. The VA can tailor its operational systems for specific requirements to a greater extent than can generalized support activities. This is due largely to the visibility VA has over its own operations.

• Even without considering obsolescence, DSA support costs are significantly higher than those of civilian activities. This is due to the type of management required for military logistics support beyond that required for civilian systems, to the economic and demand characteristics of the items being supported, and the high costs of inventory investment associated with low turnover.

The cost of subsistence support by the military system is significantly lower than that of other military product line support activities. This is the effect of item limitations, high turnover, and low obsolescence rates for product lines provided by the Defense Personnel Support Center (DPSC).9

• The data give no clear indication of economies in size of operations. The VA, the smallest activity, was very low in cost. Within DSA, no clear relationship was apparent between size and cost.

Four categories account for most of the cost of depot stock support programs: • Inventory management costs

• Storage costs

• Annual return on investment costs for inventory owned

• Costs or economic losses associated with disposal of obsolete and unneeded inventory. Of these four cost categories, only the first two are shown currently in the operating bud

A more detailed analysis would show a range of costs for the individual activities shown, depending on the product line being considered.

get. Management has a direct cost responsibility only for the first two. The third is not considered, and the fourth is considered only from the standpoint of the financial health of the stock funds. All of these cost categories result from taking title to goods so as to provide responsive support to the user when the need arises. However, the total cost to the Government of stocking goods for interagency support is substantial. Economy requires that all costs of support should be considered in evaluating alternative means of providing commercial product support to using activities.

Interagency Nonstock Support Programs

For some requirements, interagency support is provided by means other than depot stockage. Commercial distribution channels may be used to provide direct delivery to the user or to some point between the manufacturer and the user. In this case, the price paid the vendor will be higher to reflect the distribution services received. Total costs of interagency nonstock procurement programs are estimated at $87.3 million annually, as shown in table 6, and the average cost of this support is estimated at $3.40 per $100 procured.

A comparison of the data in tables 4 and 6 shows that the cost of interagency activity for stock support is many times that for nonstock support, whether obsolescence costs are inIcluded or excluded. Part of this difference is offset by higher delivered prices for nonstock program items.

In addition to these direct delivery purchases, each of the agencies shown in table 6 operates call-contract programs for use by field pro

curing activities. The annual volume of procurement under these programs is over $1 billion for DSA (Supply Bulletins), $751 million for FSS (Federal Supply Schedules), and $78 million for the VA (Federal Supply Schedules). The interagency cost per $100 procured for providing call contract support under these contracts is very low due to high overall volume usage. Estimates of cost per $100 procured were $0.79 for FSS, $0.16 for VA, and under $0.05 for DSA.10 Transaction costs by field agencies in using these contracts are also very favorable.

Conclusions

The cost of interagency support activities is substantial.

The cost per $100 of providing interagency depot stock support averages 15 times greater than that of providing nonstock support. Part of this difference is offset by higher base prices for direct delivery programs.

The cost of stock support in military logistic systems is significantly greater than in civilian systems. Much of this difference arises because of the nature of the items and the primary missions supported.

There are no indications that size of a Government operation contributes to economy in interagency support. No simple correlation of cost and volume is apparent.

There is a lack of visibility of the cost of interagency support programs.

Consideration of the cost of interagency support is essential if economical support systems are to be developed and installed.

STATION SUPPORT COSTS

We estimated the costs incurred for procurement and distribution support provided at the level of the using activity. This complemented our analysis of interagency support costs. Support at the using level encompasses the complete cycle of the costs of meeting needs for

10 Study Group 13A (Commercial Products), Final Report, Feb. 1972, vol. II, exhibit VII-2-2, 2-3, and 2-6.

commercial products. The cycle starts at the point of demand or user need and includes costs such as local procurement, supply, handling, storage, and accounting, and extends through delivery to the user.

To develop using activity costs, we visited selected activities and were supplied data on operational costs and the costs of support functions. It was necessary to cost personnel time and rely on the activities visited for estimates of time and resources devoted to support programs. The costs developed do not consider any allocations of general management overhead. Functional management was included only if time had been allocated to the specific activities being considered. No costs were included for financial control or payment systems. Generally, costs were developed based on time used or estimated average costs for a type of transaction.

Our sample primarily represents military activities because civilian activities visited could not generate suitable data, or the level of activity was so low that segregation of specific costs was not meaningful.

Vehicle Fleet Maintenance

We estimated the cost of support for vehicle maintenance activities at eight locations. The systems and procedures used to fill requirements varied widely due to different operating conditions. These cost estimates 11 are summarized in table 7.

Table 7 shows that:

The cost of station support for vehicle maintenance varies from $27 to $108 per $100 of parts used. Generally, lower costs are associated with high-volume users.

• The average cost of this support, at $44 per $100 used, is a substantial cost element in meeting user needs.

• The lowest cost for support per $100 used is $27 at location 7. This activity has a contractor operated parts store (COPARS) support program for part of its needs. The same is true for location 8, the $36 cost operation. Low operational costs of these

11 Costs here are for the support activities only; they do not include the prices paid for the products themselves.

« PreviousContinue »