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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." The vendor service included product placement on shelves.

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Pricing

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.

Commercial Distribution

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.

Not elsewhere classified

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.

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.

Conclusions

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.

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:

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.

Decision Effectiveness

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.)

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.

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.

Operating Management

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.

MANAGEMENT OF COMMERCIAL PRODUCT ACQUISITION

We believe the current procurement environment and management practices of the Government should be changed to focus more directly on the application of total economic costs in acquiring commercial products.

National Policy Requirements

Executive branch policy concerning the acquisition of commercial products should be clearly established and consistently applied throughout the Government. We believe this goal can best be achieved through the leadership of a nonoperational entity such as the

Executive Oversight

The effectiveness of commercial product acquisition systems requires continuing visibility of operations at all levels of management. It is also essential that Congress and the public have operational visibility in order to promote confidence in the integrity of the system.

Top management needs better reporting systems and improved statistical data to make the decisions required to implement the recommendations of this report on the acquisition of commercial products. They offer the potential for greater user satisfaction and substantial savings. The key to achieving this potential is enlightened, aggressive management.

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