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As a' followup on the utilization of trial-balance information for inventory control, a second study was made on base inventory levels with particular emphasis on a FEAF-wide chart showing each base commander how his store rated with others of the command. A brief review of this chart clearly disclosed those bases hoarding excess inventories. Another highlight of the study was the introduction of inventory turnover ratios. Fundamentally, "inventory turnover" is the relationship of monthly sales to month-end inventories. This method of evaluating the inventory program of a store is used because it provides a standard unit by which all stores can be compared. The initial goal of 17 percent monthly turnover was suggested by this headquarters in September 1952. In the 3 months that followed, clothing-sales officers reduced their combined inventories by an additional $1 million and increased the command inventory turnover rate from 6 to 11 percent. As many of the larger stores surpassed the 17 percent mark, it became evident that our standards were too low. In March 1953 all clothing sales store officers were requested to attain inventory turnover rates of 15 or 25 percent, depending on the sales volume of the store. These dual rates were considered advisable by this headquarters because of the requirement for a large-size range of clothing at the stores with small sales volume which keeps them from reaching the high rate of turnover enjoyed by the larger stores. It should be noted that the 25 percent turnover rate corresponds to inventory levels established in paragraph 2a, section 8, volume X, AF Manual 67-1. The manual establishes a 90-day stockage objective plus a 30-day pipeline which will give a 100-percent turnover every 4 months—25 percent per month. As an aid in adjusting to this inventory standard a size tariff table is being prepared by this headquarters. Distribution is expected within 30 days. Chart No. 1 indicates the progress of the class A stores toward their 25 percent goal and that made by the class B stores toward 15 percent turnover. During the past 6 months 3 stores have increased their turnover rates by at least 9 percentage points, although the majority have shown only small improvements. In this respect it should be noted that September 30, 1953, is scheduled for the completion of this project.

3. Looking back on the supply-and-demand aspects of the clothing stores, it seems almost impossible that major item shortages could have existed. At the peak of the initial distribution of blues, monthly sales and issues reached $575,000 with a command inventory 18 times greater. Even this substantial inventory cushion did not eliminate inventory shortages which in many instances have been carried through to the present day. From the materiel standpoint this problem is a constant one that can be traced to the complexities of controlling such an enormous stock, back orders from zone of interior depots and the fact that combat support takes precedence over secondary supply classes. From the Air Force financial point of view the problem is one that emphatically points to the need for more efficiency and more economy in dealing with the taxpayer's dollar. A commercial enterprise of either the largest or smallest proportions could not possibly remain solvent on the inventory structure we have used for clothing sales stores during fiscal year 1953. It is true that private and corporate business organizations are heavily influenced by competition and profit motives, but the Air Force cannot disregard principles of economy because these specific motives are not present.

4. Our program for controlling inventories has been presented, but sales volume remains at the discretion of the customers. In some instances promotion programs and clothing standby inspections have increased sales, but generally they provide only a small incentive for the individual to purchase additional clothing items. Inventories and sales per month are now approximately half those reached in January 1952. During the past fiscal year we have had a gradual increase in sales volume throughout the command that is attributed to the expansion of clothing stores into Korea and increases in command personnel strength. As shown on the following graph sales show a gradual decline in the summer months due to the lower-priced items being sold. Then as the higherpriced items come into demand in October, sales rise sharply. This cycle is expected to repeat itself during the current fiscal year which should enable clothing sales officers to make a fairly accurate estimate of their potential sales for any period. Inventories should be planned accordingly.

CLOTHINO SAUS VOIUME DURING FISCAL TEAR 1953

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Jul Aug Sep Oct Nov Dec Jan Feb Mar Apr Kay Jun

5. Of special importance in the analysis of sales is the relation between cash and credit sales. Credit sales, more commonly referred to as health and appearance sales, have been the subject of considerable correspondence from Headquarters, United States Air Force. In response this headquarters has initiated several programs for the purpose of reducing such sales. In March 1952, Headquarters, United States Air Force made a survey of credit sales by all major commands. The Far East Air Forces ranked ninth with 21 percent of all maintenance sales on the credit basis. In comparison a recent survey showed that this command had reduced such sales to 2 percent of the total maintenance sales. It is intended that the command percentage of health and appearance sales be held within this limit during fiscal year 1954.

6. Another area that warrants close attention is the trend in average monthly purchases by each individual assigned to the command. Several studies on this subject have shown that during the past year the individual officer and airman's monthly purchase has maintained a consistent average of $2.20. The actual amount that the average person will spend in sales stores has become increasingly important in recent months due to the fact that many of the smaller installations are requesting clothing stores or branches. By multiplying the average monthly purchase times the number of personnel assigned to the base a fairly accurate estimate of potential sales can be made. From these figures an appropriate initial inventory can be established that will yield the desired inventory turnover rates. In such cases the principle of limiting inventory to a monetary level is being introduced. Eventually it is planned that all bases will be provided with a dollar limitation on inventories, but this type of control will not be initiated until commanders have had sufficient time to attain the prescribed inventory turnover rates of our current project. (See paragraph 2.)

7. In the analysis of sales trends and their relation to other phases of store operation, the expense factor can hardly be neglected. Considerable study has been performed on the relationship of these two aspects which has proved that there are wide inconsistencies in store operating costs. The Far East Air Force clothing sales store operating statement for fiscal year 1952 provided all installations with a comparison of operating costs per $1,000 sale. At the time costs ranged from $28 to $222; however, during the period studied the blue uniform was being distributed, causing high sales and abnormally low costs. As shown on chart No. 2, costs during the past year have increased due to smaller sales volume and continue to show broad variations on bases with approximately the same sales. Those bases requiring management studies are evident. In this area it is planned to establish a standard operating cost per $1,000 sale depanding on the business of the store and the prevailing wage for nonmilitary personnel at the various installations.

8. Inventories, sales, and costs of the clothing sales store in Korea have presented a unique picture. An inventory of approximately $300,000 is presently supporting a monthly sales volume of between $60,000 and $80,000. As stated in the April 1953 edition of the Headquarters, United States Air Force, Comptroller News, this inventory position is probably the best of any clothing sales store within the entire system. To this we add that 99 percent of all sales are on a cash basis and the cost per $1,000 sale is the lowest in the command. There is no doubt about the fact, supply and demand factors as experienced in Korea are among the most favorable in the Air Force. All shipments are airlifted from the Japan depot to K-2, where the bulk storage is located. In the event that the mobile outlet needs additional items they are airlifted to the appropriate base within a few hours. Although an in-kind issue system is in effect for some items in Korea, the demand for store merchandise remains at a constant high level. In addition, the continuous rotation of large numbers of personnel in and out of the area and the fact that the mobile unit can only visit each site periodically accounts for the rapid inventory turnover. There are many stores in Japan that have just as favorable supply support but have only shown a small degree of suQcess in adjusting to an inventory position similar to Korea.

9. In summary it should be pointed out that the monetary accounting system for clothing sales stores has proved itself as a valuable aid in store management. The projects outlined in this report and many more on losses and gains have given tangible proof that stock fund accounting records and reports can be used by every echelon. During the next 12 months we expect to make even greater use of trial balances to improve store operations. The objectives toward which our policy will be focused during fiscal year 1954 are as follows:

(a) Bring sales store inventory turnover up to the desired levels by September 1953, thereby effecting a better distribution of clothing items. As distribution improves, clothing sales store officers will gain more confidence in the depot. This in turn will lessen the requirement for large stocks at the bases.

(b) Reduce the Far East Air Forces share of the clothing stock fund to a practical and economical working level. This means a $2,500,000 reduction in present depot and store inventories.

(1) Place a dollar limitation on the working inventory of the stores and depots of the command within which they would be compelled to operate.

(2) Require all depots and stores to price requisitions. The value of these requisitions would be considered as part of the working capital authorized the base or depot account.

(c) Perform continued study on all types of losses and gains for evidence of conditions requiring corrective action.

(d) Maintain the ratio of health and appearance sales to total maintenance sales at the current low level.

(e) Obtain a greater degree of control over in-transit shipments with prompt and effective followup action when a shipment has not been received in reasonable time.

(/) Bring clothing sales store operating costs into a proper relationship with sales volume. The most economical store operation within a given sales range will be the standard.

10. Although the clothing division of the stock fund makes up only a small part of the supply picture, it is felt that the progress made during the past 2 years highly justifies the management improvement programs listed above. Only when these projects have been completed and our resources are effectively aligned to our actual requirements can it be stated that the Government is getting maximum utilization from the stock fund investment in the Far East Air Forces.

By order of the Commander:

L. J. KEATIKG,

Major, V8AF, Assistant Adjutant General.

Chabt 1.—Clothing sales store inventory turnover

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Note.—Sales and inventory data were taken from clothing sales store trial balances, RCS-AMC-CL Iwakuni CSS has been reclassified as a class B store.

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Senator Flanders. The hearing will come to order. The success of any committee's work depends in large part upon the expert staff assistance which is available to it. Mr. Schneider, whose assistance was so valuable to the Defense Establishment Task Force of the Hoover Commission, did the preliminary work on the status of title IV implementation for this subcommittee.

This work, accomplished with the able assistance of Mr. Carter 3urgess, has resulted in the fine document summarizing the status :>f title IV in the Defense Department which was submitted to us on July 28, 1953.

IMr. Schneider, widely respected among his colleagues in the financial and industrial community for his broad knowledge of management practices, is executive vice president of the Newmont Mining Corp. of New York City. His civilian experience and his intimate knowledge of title IV make his contributions to our work uniquely valuable.

I should like to submit for the record a brief biographical sketch of Mr. Schneider.

(The document referred to is as follows:)

Franz Schneider

Corporation executive, born July 11, 1887, Lawrence, Mass. Graduated from

Massachusetts Institute of Technology, B. S. 1909, M. S. 1911; financial editor,

New York Evening Post, 1920-25; financial editor, New York Evening Sun, 1926

30; associated with Newmont Mining Corp., New York, N. Y., 1930 to date,

presently executive vice president of that corporation; member of the boards of

directors of a number of corporations; attached to General Staff of the United

States Army during World War I; Associate Deputy Administrator of the War

Shipping Administration during World War II; special advisor to the Director

of tbe Office of War Mobilization and Reconversion; staff consultant, Committee

on National Security Organization of the Commission on Organization of the

Executive Branch of the Government.

Senator Flanders. Before Mr. Schneider commences his testimony, I should like to introduce into the record, for inclusion in the appendix as exhibit A, a letter which I received from him under the date of July 28, 1953, transmitting to the subcommittee the preliminary report to which I referred earlier. I should also like to make the report itself a part of the record as exhibit B.

Now, Mr. Schneider, will you proceed with your statement?

STATEMENT OF FRANZ SCHNEIDER

Mr. Schneider. Thank you, Mr. Chairman. Incidental to its military purposes, the Department of Defense conducts the largest business in the country, if not in the world. It operates a great fleet of ships and a worldwide air-transport service. Its shipbuilding and ship-repair yards and its airplane-servicing shops, rank it with the biggest enterprises in those lines. Its arsenals and other manufacturing plants justify comparing it with a great industrial corporation. A system of huge bases is scattered throughout the world. Its inventories, by any business standard, must be described as colossal. Its payrolls embrace some 4,700,000 individuals, some 1,200,000 of whom are not in uniform. After all, the Department is disbursing nearly $45 billion a year.

Yet all this tremendous business is being carried on without benefit of the competitive urge or of the profit motive. In any ordinary business the management and the stockholders have uppermost in their minds the question of profits—which make dividends possible. Profits and dividends are the reasons for existence of the enterprise. All

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