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The price savings of interagency schedule and term contracts are significant. However, the COPARS and local vendor support systems we examined were more responsive, and the price savings of the interagency contracts would not have offset other support-system costs. In addition, costs associated with workforce productivity and vehicle availability ultimately must be considered.
Federal Supply Schedule contracts that provide for shipment from manufacturers' warehouses to the user cause problems involving timeliness, correct identification, and communication of the need. These problems are minimized when Federal Supply Schedule contracts provide for local delivery through a dealer distribution system. Under these circumstances, daily delivery or pickup usually is possible and the user can order the item needed from the supplier by telephone. While unit prices paid to dealers may be higher than those paid directly to the manufacturer, landed costs are usually more favorable and local small businesses can participate.
To summarize, with the various fleet-maintenance requirements and using-activity support programs, there is no one best acquisition system to meet everyone's needs. Exploring alternatives and weighing cost-benefit possibilities will provide a basis for structuring an economical, effective support program to fit specific needs.
SUPPORT SYSTEM COSTS Calculated from data presented in Appendix F, Tables F-2, 4, 5, and 7; based on cost per $100 sold with obsolescence.
possible to identify each item procured to an equivalent item under the FSS program. The results are in table 10 (prices are stated in terms of an index, with the small purchase prices being 100).
Compared with competitive small purchase prices for the same or equivalent vehicle parts:
• On 122 items, COPARS prices were 13 percent lower even though the COPARS operation included two full-time contractor personnel to run and manage the “store” at the base. • On 48 items, FSS regional term contract prices were 23 percent lower and COPARS prices were 15 percent lower. • On 20 items, Federal Supply Schedule prices were 30 percent lower and COPARS prices were 6 percent lower.
Facility Maintenance Costs
Using data developed in a manner similar to that used in the vehicle maintenance analysis, figure 3 shows the relationship of support cost
to purchase price ($100) under various procurement systems.
Support costs are usually higher when items are obtained from interagency stocks than when they are obtained from a local vendor or contractor operated civil engineering supply store (COCESS). This is because of the high cost of maintaining Government stocks. In the case of the COCESS, supply and procurement (by item) are bypassed, and stock support is provided directly by the vendor.
The discount from retail prices, at one of the military installations we visited where a functional support contract was being used, varied from 10 to 30 percent. 16 This discount depends on the scope of the contract and the number of items excluded due to mandatory sources of supply. Excluded items are generally of high volume and quick turnover. When fastmoving items are furnished by a mandatory supply system, local vendors are left to supply slowmoving items and therefore must increase their prices. Split supply sources also require costly manual screening of all items as requirements are generated.
The pattern of cost relationships for facility maintenance as shown in figure 3 is similar to that shown for vehicle maintenance in figure 2.
16 Procurement Division, Castle Air Force Base, Merced, California. Contract FO 4604-71-C-0166, Aug. 18, 1970.
We used a different approach to determine the landed cost of food products acquired for military dining halls. The estimated cost of the acquisition process was determined by taking the purchase price for a product, adding the cost of rail transportation to first destination based on Government rates, and applying the cumulative amounts of separate markup factors of interagency and usingactivity support costs as developed from the data in Appendix F. All cost factors were adjusted so that the same basis was used throughout. The interagency factor was adjusted to remove first destination transportation charges. Items used were selected from the 50 highest dollar volume products.
The six activities selected did not obtain a significant portion of their standard nonperishable subsistence from local vendors. To develop a local vendor alternative, we contacted vendors and obtained prices on the basis of delivery to the kitchen storeroom. Vendor prices were based on specifications for the same set of standard institutional food items for which estimates of Government landed cost were developed. The results are summarized in table 11, based on an index set at 100 for the FOB origin price.
reports showing the operational costs of wholesale trade, the average cost for commercial channels of distribution before payment of taxes was $20 per $100 procured in 1967 (see table 12). This compares favorably with present Government interagency stock program costs.
On the basis of price alone, the Government appears to be saving significantly by taking title at origin and performing the distribution service itself. When landed cost is considered, the situation is reversed.
The high-volume activity of commissary resale provides opportunities for delivery of brand-name products at a lower rate than for dining hall service. According to industry sources, the wholesale grocery industry services large supermarkets on the basis of a markup over cost of four to six percent. The vendor comparison we developed shows the delivered cost to be 13 percent lower than the Supply Bulletin prices.17 The vendor service included product placement on shelves.
Source: Computed from statistics of income, 1967, Internal Revenue Service, pp. 12-13, and Study Group 13A, Final Report, vol. II, exhibit VII-4-6, p. 795.
Price frequently is thought to be directly related to volume of purchase. Within limits, the greater the quantity, the lower the price. Much of the Government's acquisition strategy seems rooted in the belief that buying large quantities produces economies in production, marketing, and distribution. The landed cost concept adds a new dimension to this consideration. The real cost to get the product to the user is increased by all actions necessary to increase quantities and lower the unit purchase price. Lower prices are obtained through quantity purchases, but this method requires Government systems for communicating and consolidating requirements. Thus some part of the reduction in price achieved through quantity purchases is offset by Government assumption of usual seller costs. Such costs arise from needs for increased personnel, warehousing, and transportation.
The data in table 12 do not mean it is a toss-up between the two ways of meeting user needs. To develop a landed cost comparison between the use of commercial channels and the use of Government sources to meet user needs, the cost of the two alternatives must be considered.
Costs of transactions with commercial distributors vary greatly depending on the procurement arrangement and the system used to develop and to communicate needs and to deliver the product to the user. COPARS-type operations and local requirements contracts may have low unit-cost characteristics, but are not always practical since the activity, functions supported, types of products required, form of organization, location, and many other factors may dictate the use of an alternative support method.
Nevertheless, we find that prices to the Government vary above and below those available to commercial users. Generally, when products are procured for stock in large volume, the Government is able to buy at a lower price.
In summary, landed costs using commercial channels of distribution appear competitive to using Government sources and in many cases offer other advantages to user activities.
In considering landed cost alternatives to support the commercial product needs of using activities, the services available from commercial channels of distribution should be included. Based on Internal Revenue Service
17 Study Group 13A, Final Report, vol. II, exhibit VII-4-5, p. 793.
Athough price savings accrue from large volume purchases, this should not be the sole consideration for using interagency support systems.
The costs of the acquisition process (the nonpurchase price portion of landed cost) are often well over 50 percent of the purchase price of the product procured.
Landed cost characteristics vary widely; valid decisions require tailoring to specific user needs.
The landed cost characteristics of commercial channels of distribution appear to be a viable alternative that should receive consideration if support decisions are to be costeffective.
Many factors must be examined to determine the best way of supporting agencies' requirements. Total cost and overall advantages to the Government are the primary considerations ... The importance of quantifying and evaluating all Government-wide costs associated with various supply methods and actions is fully recognized.18
The difficulty arises in developing realistic cost analysis methods that will provide simple determinations of the best alternative means of meeting user needs.
TOTAL ECONOMIC COST CONSIDERATIONS
The concept of "total economic cost” considers the cost of the product, cost of the system support, and costs arising through use and disposal or consumption. Ideally, all costs ultimately incurred by the Government are brought to bear on the procurement support decision.
The objective of economy and efficiency as outlined in the policy statements of Public Law 91-129 are not being achieved by the decisionmaking systems currently in effect. The practice of not including certain costs, lack of systems cost visibility, and other inefficient practices hide the total cost of carrying out Federal missions. The Government's distribution systems can be supplemented by commercial systems to provide viable alternatives for furnishing commercial products to users. By considering the total economic costs of each alternative, the Government will ensure that its tasks are accomplished with optimum economy and effectiveness.
The value of total economic cost analysis is well accepted by Government officials and suppliers alike. In its position paper on selection of method of supply, the Federal Supply Service stated:
Based on our review of user needs, support systems, selected commercial products, and costs, we believe the current decisionmaking system has significant deficiencies. These deficiencies make it extremely difficult to use total economic cost criteria in selecting commercial product support systems.
They include: • The data base does not reflect the cost of support systems needed to make reasonable decisions. • Many decisions are made at too high a level. • Key decisions on type of support (stock versus nonstock) and organization (interagency versus station support) are made by organizations having a direct operational interest in the decision. This raises the question of organizational conflict of interest. • Consideration of total systems costs is inhibited by overemphasis on purchase price savings. • The role of the supply function in the decisionmaking process appears disproportionate to that of procurement. This role may be appropriate in critical military logistics supporting weapon systems but not for commercial products. • Traditional procurement and distribution procedures are relied on at the expense of new techniques and with insufficient regard to changes in the marketplace. 18 Federal Supply Service's paper, Method of Supply. sets forth considerations on which method of supply decisions are based. (Submitted to the Commission by FSS, document undated.)
Office of Federal Procurement Policy recommended in Part A, Chapter 2.
The criteria for the identification and interaction of elements affecting total economic cost must be clearly established in areas where we found deficiencies, such as in the development of Federal specifications, in depot stockage of low-turnover, commercial-type items, and in coordinated procurement among agencies.
These deficiencies have had the following results:
• Stock support programs are overemphasized and overused in relation to nonstock programs. This is true at the interagency, agency, and station levels. • Interagency support decisions have restricted the development of innovative and efficient station-level support systems. • The national supply system concept has been developed to assign, on the basis of product groups, support responsibility for all Government users of commercial products. This has been done in response to congressional pressure to eliminate “duplication.” Assignments are being made to both military and civilian support systems without adequate consideration of costs and other differences in the characteristics of these systems. • Mandatory interagency support prevents local vendor sources from providing products and services where they would be efficient and cost-effective if total costs were considered.
Operating personnel must be given the authority and management support necessary to apply total economic cost principles in their decisionmaking. This requires that top-level agency managers support and follow through with effective programs to achieve this capability. These programs include on-the-job training, encouragement of innovative techniques, improved coordination among staff and organizational elements, better information for decisionmaking, and other programs that have been discussed in this report.