Rear Admiral ROYAR. In the San Francisco area there is cross-servicing, because we are issuing to the Army and Air Force and Marine Corps in this area. Mr. KENNEDY. With regard to packaging, has the Navy taken any definite steps toward development of uniform standards for containers to be used in packaging of coffee? Rear Admiral ROYAR. We have used the 5-gallon tins for the vacuum. pack, which is a standard container, and the bags for the bag coffee, I think both of those are pretty well standardized and used by all the services. STANDARD FOR FACKAGING Mr. KENNEDY. The study indicated a difference in the price of bags and containers used to package coffee. Rear Admiral ROYAR. I am not familiar with the study. I have not had a chance to look that over. Mr. KENNEDY. One of the conclusions was that the military departments would do well to develop a uniform standard. Rear Admiral ROYAR. There is no reason why they cannot at all, because your shipments are all about the same, the handling is the same and there is no reason why they could not have a standardized bag. The packaging is very simple, as you saw down at the plant. There is nothing complicated about it at all. OAKLAND PLANT COULD PROBABLY SUPPORT SEATTLE AREA Mr. KENNEDY. Do you think the capacity here is capable of supporting coffee operations in Seattle, for instance, on a cross-servicing basis? Rear Admiral ROYAR. We probably could. Mr. KENNEDY. Also with regard to overseas? Rear Admiral ROYAR. But another thing about the coffee, too, is the fact it would probably be better to have that plant up there and cut this down a little bit so you would not have coffee in transit as long. Coffee deteriorates very quickly and the closer you can get your coffee to the processing and roasting plant, the better coffee you get. Of course, the Army plant at Seattle supports Alaska and they are several days closer to Alaska up there than we are here. Mr. KENNEDY. With regard to cross-servicing we mentioned a moment ago, the study has a paragraph in here in which they say under a cross-servicing agreement in the Great Lakes area, the Army furnished an average of 60,000 pounds, or 25 percent of the monthly production to Navy installations in the fourth, ninth, and tenth naval districts. However, it is significant to note that a cross-servicing agreement between Army and Navy utilizing Army plants in Seattle and Atlanta has not been established at the present time. (Oakland exhibit 4 includes cross-servicing agreement executed September 18, 1952.) Rear Admiral ROYAR. I see no reason why they should not be established. I think they should, because we know here it is working out perfectly in the Oakland area. We have no trouble at all. The Army furnishes the green coffee and we roast and distribute it. Mr. KENNEDY. Are there any plans in the Navy at the present time with regard to establishing overseas coffee-roasting plants? Rear Admiral ROYAR. We have no plans for that at all. Mr. KENNEDY. You mentioned the shipment of this material overseas; is there any planning at the present time to have drawings from these Army coffee-roasting plants overseas for adjacent naval installations or ships? Rear Admiral ROYAR. There is. How far it has gone, I do not know, but there is some discussion, or was, between our provisions group in the Bureau and the Quartermaster Corps about the Army taking over more of the Navy supply in the Seattle area and some of the export work in that area. That is a matter now under discussion to find out the capacity and what the capabilities are. I think you will probably see that come about very shortly. I am in hopes it will, because it should be done. USE OF SOLUBLE COFFEE Mr. KENNEDY. Mr. Curtis mentioned soluble coffee, which we realize, of course, as in the experimental stage in the coffee industry-Rear Admiral ROYAR [interposing]. That's right. Mr. KENNEDY. In view of the fact that you are in the business, have you made any studies with regard to the substitution on an experimental basis, since you are such a large consumer? Rear Admiral ROYAR. As I said before, we have no plans of developing any of the soluble coffee in our present plant. There are certain fields where it will go pretty well. I imagine, for instance, in the submarine fleet, for example, where space is vital it might be considered. I know that our research and development people in Bayonne have been looking into the matter, but, so far, we have no definite plans yet. There is no consideration being given to going into it in any large way at all. Mr. KENNEDY. Is the cost one of the factors that has discouraged your interest? Rear Admiral ROYAR. That is one thing, and the quality too. There are several factors in there that we are trying to look into. Whether it will develop or not, I am not prepared to say at this time. Mr. CURTIS. If you pursue that any further, as I understand it, under the new directive, that has to be cleared by the Secretary of Defense? Rear Admiral ROYAR. Secretary of Defense; yes, sir. Mr. CURTIS. And anything going into that would have to be? Mr. BONNER. Admiral Hipp, I want to thank you in behalf of the subcommittee for your kindness and courtesies extended to us and you also, Admiral Royar, and the gentlemen of your staff who have been with us here on the base. Of course, we come out to get information; we come in a friendly spirit and we come representing the people and also representing you back in Washington. This subcommittee does not come to any conclusions here in the field. We go back and these hearings are prepared and written up and the subcommittee, as well as the staff, studies and analyzes what we find in the hearings and then comes out with our report. I do not want you to think that we come to any conclusions here imme diately about any of the subjects which we go into. This is such a vast field, that we cannot go into everything. We have to pick out a few things and make a test of them-a "guinea pig" test you might say. We appreciate very much your presentations and your courtesies and the subcommittee is adjourned. The subcommittee adjourned at 12 noon. (Oakland Exhibits 1-5 follow :) OAKLAND EXHIBIT 17 REPORT ON COST STUDY OF PAINT MANUFACTURING, NORFOLK NAVAL SHIPYARD, PORTSMOUTH, VA. The report on the cost study of paint manufacturing at the Norfolk Naval Shipyard, Portsmouth, Va., based on operations during the fiscal year ended June 30, 1951, was made by the Navy Cost Inspection Service to serve as a basis of study and comparison with commercial paint manufacturing. This study, together with a similar one made at the Mare Island Naval Shipyard, Vallejo, Calif., is being used by a selected committee of the National Security Industrial Association for the purpose of additional analysis and comparison of the cost of Navy paint manufacture with that of commercial manufacture. ule II. Summary statement of indirect factory expense and direct labor of Exhibit B, schedproductive and process shops‒‒‒ Computation of general expense allocable to paint factory operations Exhibit C. Exhibit C, sched ule I. Explanatory comments with respect to footnotes referenced on exhibits and schedules of report---. Flow chart of paint factory operations__. Exhibit D. COMMENTS Authority for study and purpose thereof 1. In compliance with the request of the Chief of the Bureau of Supplies and Accounts as contained in letter to the Director, Cost Inspection Service, dated June 21, 1951, file OX over L10-3/NY9, L10–3/NY6, JJ32, a cost study has been performed of the operations of the paint factory, Norfolk Naval Shipyard, Portsmouth, Va., for the purpose of determining the actual unit cost of producing each of the various kinds of paint manufactured, packaged ready for shipment. Pursuant therewith, constructive costs have been included for those cost elements not usually applied in Navy productive operations but which are inescapable to a commercial enterprise. Historical data 2. According to Mr. W. J. Francis, paint technologist of the Norfolk Naval Shipyard, preliminary steps were undertaken by the Bureau of Construction and Repair in 1902 for the development of ship-bottom paints by the shipyard. Prior thereto, it is stated that an unsatisfactory condition prevailed in that, among other things, the various brands available from commercial sources were not compatible, with the result that each manufacturer's particular brand of paint had to be used on the vessel which had been previously painted therewith. The Supply Department, therefore, was required to maintain numerous stocks of ship-bottom paints of many manufacturers. 3. By 1906 the shipyard had commenced its manufacturing of ship-bottom paints. Its equipment at this time consisted of two shellac cutters, a small belt-driven mixer, and several small mixing tanks together with some wooden Navy making comprehensive cost study of its paint manufacturing. (See testimony of Vice Adm. C. W. Fox, before subcommittee, December 4, 1952.) half barrels and paddles for hand mixing. Under a master painter there were three or four helpers engaged in making paint which was for local use only. 4. During the early days each navy yard made its own paints except for shipbottom paints. Paste pigments in oil, such as white lead and zinc oxide, were purchased, since the process of grinding pigments in oil was considered too complicated an undertaking, and the yards mixed their own paints, adding coloring pigment, thinners, and driers. Finally, when commercial paint concerns were unable to supply sufficient quantities of pigment-in-oil pastes, the shipyard in 1916 installed two iron grinding mills and proceeded thereafter to grind its own paste pigments. 5. In 1924 the paint factory at the Norfolk Naval Shipyard started manufacturing varnish, using formulas and processes developed by the yard's paint laboratory. Other products, such as camouflage paints for ships and submarines, were gradually added to the list of manufactured items. In 1925 the equipment in use at the Philadelphia Navy Yard was transferred to Norfolk Naval Shipyard, and the present site of its paint factory (building 62) was occupied. By 1935 the shipyard was manufacturing paints and varnishes for all the naval shipyards and stations located on the east coast. 6. The paint factory has experienced tremendous growth since its modest beginning. The diversity of its products is evidenced by the listing of 87 standard paint and varnish compositions in the 1939 edition of Appendix 6, Instructions for Painting and Cementing Vessels of the United States Navy. The factory's equipment now includes five-roll and three-roll roller mills, pebble mills, steel ball mills, and high-speed stone mills for grinding paint, power mixers, and automatic filling machines. 7. Housed in a three-story building, the paint-manufacturing process begins on the top floor where the pigments and vehicles are mixed into paste which flows by gravity to the grinding mills located on the second floor. The manufacturing process is completed on the first floor in blending tanks, with the addition of driers and solvents and perfection of shading and viscosity. Exhibit E hereof depicts in graphic form the various steps in the paint-manufacturing cycle. Scope of review 8. The paint factory's operations for the fiscal year ended June 30, 1951, considered reasonably representative of prevailing operating trends and conditions, were selected for the purpose of developing the unit cost data reported on herein. The basic cost data upon which the results of the subject study are predicated was accumulated from the following monthly reports compiled by the shipyard for submittal to the Chief, Bureau of Supplies and Accounts; viz. S. and A. Form 285a, Paint Manufacturing Shop Cost Summary; S. and A. Form 285b, Paint Manufacturing Plant Output Cost Summary; S. and A. Form 419, Summary of Overhead Expense; S. and A. Form 299, Detailed Statement of Shop Expense; and S. and A. Form 299 B-03, Power Plant Operation Costs, Transfers, and Distribution of Customers. While the information and data depicted thereon was not subjected to detailed audit and verification except with respect to direct material costs, suflicient tests were performed with respect thereto to substantiate the applicability of the costs chargeable direcly or indirectly to paint-factory operations. Direct material costs were analyzed in considerable detail in order to establish the propriety thereof and to permit the determination of freight charges as well as purchase discounts where applicable. Findings 9. As evidenced on exhibit A hereof, the naval paint factory manufactured 2,325,041 gallons of paints and varnishes comprised of 90 various mixtures of formulas during its operations in the fiscal year ended 30 June 1951. in addition thereto, 3,326,201 pounds of vehicles and oils, consisting of eight individual types, and 228,830 pounds of putty of four varieties were produced. The total output of 6,037,734 units also included the canning of 91,814 pounds of vehicles and oils (raw-material stores) and the reworking of 65,845 gallons of paints. 10. The summary of paint factory's output contained on the afore-mentioned exhibit A further indicates that the total cost of production for the subject period aggregated $4,948,669.12, inclusive of constructive costs, the application of which is more fully discussed in paragraphs 15 and 16 below. 11. In accordance with paragraph 66258, subparagraph 3h (1), of the Bureau of Supplies and Accounts Manual, units of output for the purposes of this report have been grouped in the respective classes which were established thereunder for the specific purpose of providing a medium for the distribution of direct labor and indirect factory expense through the application thereto of prescribed production and canning factors. Pursuant therefore to subparagraph 3h (2) of the manual, which denotes the particular production and canning factors to be utilized, direct labor and indirect factory expense have been distributed to the various units of output exclusive of reworked units for which production factors are not available, in which case the processing costs applicable thereto were determined on the basis of estimates obtained from the shipyard's fiscal office. It will be noted, however, that the amount of paint reworked during the period under review constituted a rather minimal part of paint factory operations. 12. Schedule I of exhibit A represents a detailed analysis of the paint factory's costs of production for the fiscal year ended 30 June 1951. The adjustments reflected thereon are considered to be adequately explained in the footnotes appended thereto and in the related exhibits and schedules furnished herewith in support thereof. The ensuing commentary is therefore intended to high-light only those matters which are considered sufficiently significant to warrant -emphasis or additional explanation and clarification. 13. As indicated on exhibit A and schedule I hereof, material is the preponderant element of cost in the manufacturing of paint and its related products. As a result, considerable effort was expended in reconciling the cost of raw materials requisitioned for, and consumed in, the manufacture of the output yielded during the period under review, and in determining to the extent deemed feasible and practicable the delivered unit cost of raw material. The weighted average unit cost developed herein was based on purchased prices substantiated by the individual procurement contracts concerned, with appropriate adjustment to give effect to freight charges where applicable and to purchase discounts when available. It was thus determined, as noted on schedule I hereof, that material costs were understated in the amount of $253.838.67, representing a 6.3 percent variance between the delivered unit cost of raw material and the standard unit cost charged to paint manufacturing. The direct material cost as adjusted represents 85.81 percent of total cost of production for the fiscal year ended 30 June 1951. 14. In compliance with the instructions of the Bureau of Supplies and Accounts as cited in paragraph 66258, subparagraph 3f, of the manual, no general expense was distributed by the shipyard to paint factory operations. For the purpose of this report, however, and in conformance with commercial cost-accounting procedures and practices, that portion of the shipyard's general expense applicable to its industrial activities was utilized for the purpose of determining a proper and allocable amount of such expense for apportionment to paint factory costs. Exhibit C, schedule I hereof, presents a detailed analysis of the general expense of the shipyard and the portion of each individual account thereof which has been allocated to industrial functions, based on studies periodically performed by a committee established for such purposes, subject to the approval of the commander of the naval shipyard. Exhibit C depicts the adjustments to industrial general expense made by the cost inspector prior to the distribution of an allocable portion thereof to paint factory costs. Attention is invited to the fact that processing cost (direct labor and indirect factory expense), rather than manufacturing cost, was used as the basis for apportioning general expense to paint factory operations, in view of the disproportionate amount of raw material consumed therein. 15. Constructive costs consisting of significant cost elements not incurred directly by a Government-operated facility but which are inescapable to a commercial enterprise are reflected on exhibit A, schedule I, and supporting exhibits B and C and are further explained on exhibit D hereof. With respect thereto, it is to be noted that the provision for the Government's ultimate contribution to the pension fund was computed on the basis of 61⁄2 percent of total straight-time pay, although many of the shipyard's employees were ineligible therefor by reason of temporary indefinite employment status. It is nevertheless believed that the potential overstatement of such costs is substantially offset by the elimination of Federal old-age benefits tax from general expense, together with the fact that retirement allowances were not determined for the military personnel whose compensation, where applicable, was added to general expense. 16. Provision for insurance on buildings and contents (see notes 4 and 11 of exhibit D) was computed at rates which are considered above average from a commercial standpoint but which have been represented as being proper and not unreasonable for application to a shipyard housing the various activities incident to a military establishment, as well as paint-manufacturing operations. 17. No adjustment was required with respect to annual and sick leave allowances since an entire fiscal year was utilized for purposes of this report. |