centage of any item which a warehouse would be permitted to ship to one contractor in any 1 month-intended to prevent a single contractor from stripping a distributor of a particularly critical item. The warehouses were to obtain their inventories in two manners: First, by purchasing what they could from excess stocks of contractors, and second, by filling in the gaps with orders to prime producers of the goods. At this stage, when a contractor reported an excessive stock to ASU he was put in touch with the new contract warehouses and was told to negotiate with them for the sale of his excess materials. It was suggested by ASU that the holding contractor follow a fairly uniform pattern of discounts below current market price, in disposing of excess stocks to the contract warehouses. This pattern of discounts varied with each commodity, following the distribution practices of the particular industry, but, in each case, was intended to provide proper compensation for the contract warehouse when the material was resold. In other words, the contract warehouse would procure materials for stock, and sell them to those requiring them, in a normal industry pattern. Part of the inventory would come from excess stocks, part from original producers. But in either case, a contractor needing material urgently was dealing with an actual inventory in being and not with a figure on a card index, which might or might not be accurate. So far, so good. The original faults (errors in reporting, lag in deletions, and diversion of reported items to other use) were eliminated. ASU still had tight control of the program and of the agents and their actions. The program progressed smoothly for all concerned. In 1944 however, an unforeseen problem arose. Up until that time, the market price of aircraft materials and components had been fairly firm, accurately reflecting the costs of manufacture. However, as manufacturers of the goods gained more and more experience, and as quantities increased to a point where manufacturing savings could be made, the price of the materials from the prime manufacturer began to turn soft, and actually slip rapidly downward. The manifestation of the free market left the earmarked warehouse in a predicament. If the warehouse followed the level of the market, and sold shelf stock at market price, it would lose money on the transaction. However, if it refused to follow the market downward, and simply sat tight on its inventory, then the AAF would take the inventory off its hands at the end of the program with no loss to the warehouse, under the terms of the contracts. Thus, the warehouse found itself between the alternative of losing money, or of ceasing the selling of its earmarked stocks. Naturally, the selfish tendency was to sit tight and wait for the AAF to take the goods at cost. As soon as this problem became evident, ASU went to work to devise a means of eliminating it, and again with counsel and advice from industry, the program was again modified. This new plan, the third in the series of steady improvements on the original, provided for an outside company, acting as contractual agent for ASU, to become a clearinghouse for excess stocks, and to route those stocks into redistribution warehouses as Government-owned property, for sale at current published market prices by a chain of redistribution agents throughout the country. These agents were selected with care and after exhaustive investigation. Each agent was a reputable distributor in his particular field, with a background of experience, and with a financial and ethical reputation beyond criticism. The agent's background was required to include authorized representation on reputable lines of goods in the field which he covered. In other words, these original agents were the cream of the crop in every way. Such precautions were deemed necessary, as the agents were to be intrusted with millions of dollars worth of Government property, and even one unethical agent could bring disastrous criticism upon the entire program. The Murray Cook Corp., of New York City, was appointed (under contract) as the central clearinghouse by the Metals Reserve Corporation of Reconstruction Finance Corporation. All contractors were required to report their excess stocks to Murray Cook Corp. on prepared forms. They were then tabulated, reproduced, and distributed to agents specializing in the particular goods listed. These agents would screen the lists, and advise Murray Cook Corp. what they desired for their stock. Murray Cook Corp. would then issue shipping instructions to the owning contractor to ship the goods, on Government bill of lading, to the redistribution agents. The owning contractor would thus clear his own stocks and his own books of the excess goods, and the Government would assume ownership and begin redistribution through the contractual warehouses. Please notice the progress of the consecutive stages of the program, from inception to the above outlined stage. At every stage difficulties which were impossible to foresee had cropped up, and every new stage was a cautious and sure fire step devised to eliminate the difficulties to that date. Now, at this third stage, a program as nearly ideal as possible had been reached. Excess stocks were being rapidly removed from the plants of contractors, and rapidly reoffered for sale. Millions of dollars' worth of goods were pulled out of dead stocks and efficiently channeled back into use. The return to the Government was high. The cost of the program was low. All of these steps had been taken under the direction of the Aircraft Scheduling Unit, at Dayton, and under their active control. Looking back, 19 months were lost in arriving at an efficient program because of lack of precedents and experience. Starting from zero. a program was constructed step by step, and its construction took 19 long months. It is important that this serious loss of time not be duplicated. The experience gained in the years of 1942 to 1945 is still too easily available, and too valuable to be ignored. An organization along the pattern of the central clearinghouse redistribution plan can be set up quickly and efficiently, using the experience already gained, and paid for. The price should not be paid twice. Mr. HOLIFIELD. I think that preliminary part of your statement is a fine statement of the history. This subcommittee knows something about it, because several of us served on the Rizley surplus property subcommittee during this period of time you speak of. I centainly agree with you that we should not go into this coming period of mountains of excess and surplus material without a well thought out plan in advance, for the benefit of the Government as well as the taxpayer. Your proposal now starts from there? General METZGER. Yes, sir. 22862-52--2 Mr. HOLIFIELD. Will you proceed, unless there are some questions at this point by members of the subcommittee. Mr. McVEY. I would like to ask one question. I am wondering what plans you have to eliminate or curtail the purchases of material which will become surplus because of the unusual quantities ordered. I want to give you this example. This is not a rumor. It came from a manufacturer who received the order. He received an order for 200,000 brain forceps. He had manufactured, before the receipt of that order, perhaps half a dozen of those brain forceps a year. I am wondering why the services would require 200,000 brain forceps. Certainly, we do not have that much brain trouble in the services. Mr. GOLDEN. Some people question that. Mr. McVEY. What is the answer to that? Why do we order such large quantities of certain material? General METZGER. That is a little bit out of my field in the Air Force. I would answer your question in this manner. I would like to state that the requirement for any item procured by the service envisions or by necessity demands a pipeline quantity which places very often a requirement difficult to understand. When I say a pipeline quantity I mean stocks which are in transit and in distribution to the various locations of deployment of the forces of the particular service buying the item. It may be that the forces are deployed to a thousand locations, and that there may be at every location an installation requiring X number of that particular item. So it naturally follows that the numbers of locations multiplied by the number of items necessary to have on hand at one location generates a large requirement sometimes difficult to understand. Have I made myself clear? Mr. McVEY. I understand your explanation, but it does seem to me that orders are placed for quantities in unreasonable amounts that create the surplus problem which we have. General METZGER. Added to the actual number of items necessary for stock at each location that I mentioned, there is another sizable item, the quantity necessary to be in transit to these locations to replace supplies lost, damaged, strayed, or stolen, or whatever it could be. Mr. McVEY. I was only trying to get at the source of this trouble. If we are ordering quantities which are too large, if there is some way to control that we would not have so much trouble with surplus material. STATEMENT OF T. A. PILSON, CHIEF, PROCUREMENT POLICY DIVISION, OFFICE OF PROCUREMENT, MUNITIONS BOARD Mr. PILSON. I am from the Munitions Board. My name is T. A. Pilson. I believe that we made a presentation to this subcommittee on requirement coordination to which field your question pertains. The Department of Defense has gone very considerably into this program with the hope of assurance that we would not buy 200,000 widgets, whatever they are, if we did not truly need 200,000 widgets. The three departments in turn have engaged in a comparable requirements assurance program of those items which we do not con trol. We control roughly 700 important items at the Department of Defense level. Thereafter the departments themselves have set up a comparable assurance where the proponents of buying are given an opportunity to justify before a board in the Department that quantity and that item, too, so that we have gone very considerably into that. That is really another consideration, but I believe that we have made a presentation to this committee, have we not, sir? Mr. HOLIFIELD. I think a presentation was made on that by Admiral Ring. Mr. PILSON. By Admiral Ring and Mr. McNeil. Mr. HOLIFIELD. Is it not true that you have only recently gotten into a new program of coordination of procurement requirements? Mr. PILSON. That is a year old, yes, sir. Mr. HOLIFIELD. About a year old? Mr. PILSON. It is about a year old. It probably took 3 or 4 or 5 or 6 months to develop. Mr. HOLIFIELD. As you say, that is another subject. Mr. PILSON. Yes, sir. Mr. HOLIFIELD. Which I think is very important. I think we should have some hearings if we get the time, Mr. McVey, on the coordination of procurement, but the problem we are talking about here this morning is this excess after it has been generated. It can occur for many reasons. Mr. CURTIS. Could I ask a question? Mr. HOLIFIELD. Yes. Mr. CURTIS. Getting back to your original contracts, in your history, those have been cost-plus contracts, have they not? General METZGER. You are talking about the prime contracts? General METZGER. In most instances at that time they were costplus contracts; yes, sir. Mr. CURTIS. Is that not the reason why you make the statement on the bottom of page 3, "An aircraft contractor is interested in just one thing, producing and keeping the schedule," and, "is only interested in an academic way in redistribution of excess stocks." It is because he has a cost-plus contract that it does not make any difference to him if he has overbought on the prefabricated spares. Would that not be an accurate observation? General METZGER. Not entirely, sir. Mr. CURTIS Why would he not be interested in redistribution of stocks? That is the key to the thing. General METZGER. He is not staffed to act in the role of a distributor, even for his own excesses in which he has his own money invested. Mr. CURTIS. Let me interrupt again in order to keep you on the point I am trying to develop. General METZGER. Yes, sir. Mr. CURTIS. He is not interested because it does not make any difference to him in a financial way. You see, the whole trouble here is the problem we have of messing around with the profit motive which is the key to our profit system in this country. And this is a system, of course, of socialism that may be necessary, but, on the other hand, you are pointing out here that the contractor has no financial interest in redistribution of excess stocks which, in my opinion, goes back to the original form of the contract which is a cost plus, which may be necessary. General METZGER. Even under a fixed-price contract, sir, we are dealing here with surpluses generated for which the Government is contractually responsible. Mr. CURTIS. That is the whole point. That is the reason the aircraft contractor is not interested in redistribution. Is that not true? He has no financial interest in seeing to it that he does not have excess stocks. General METZGER. That could possibly be true. He has no incentive to move Government-owned property which may be surplus. Mr. CURTIS. Yes, but how does it get to be Government-owned, that is a point. Normally, if you order a certain quantity of airplanes, say 150 PBM's with which I am familiar, from the Martin plant and on a cost-plus basis, then it would not make any difference to him how many excess spares he might have floating around there, would it, if it is a cost-plus contract? General METZGER. Well, yes, it would. Mr. CURTIS. How does the Government get itself into the position of owning the excess stocks? General METZGER. Under a cost-plus contract for the same reasons, generally, that the Government finds itself in a position under a fixedprice contract, namely, engineering changes, changes in schedule and terminations where we learn as we proceed that the items we are buying are not the items which work to our advantage in combat and, therefore, call for changes in planning, changes in procurement of items and changes in engineering and design. Mr. CURTIS. How would that affect it? Let us take the subject of your AN standard fittings. How would a change of that nature give you a lot of excess fittings? I can see how some changes would affect that in a major way, but rivets, for example. General METZGER. Rivets are not an AN fitting. Mr. CURTIS. It is a standard. General METZGER. It is hardware. Mr. CURTIS. Well, you call that hardware? General METZGER. An AN fitting. They are two quite divergent problems in AN fittings and in hardware, sir. Mr. CURTIS. I am just trying to get an illustration why you would get your excess. Let me go on to my next question which will probably tie in. Do you not, when you order a certain quantity of airplanes, at the same time enter into a separate contract for a certain number of spares? General METZGER. Yes, sir. Mr. CURTIS. And is not that actually where you get a lot of your excess quantities, is it not in the unrealistic spare contract where you buy your spares? General METZGER. No, sir, we do not feel that our spare program is unrealistic. In fact, we are hurting for spares across the board today. The contractors are not concurrent in their shipment of spares with their end-item schedules. Mr. CURTIS. Then that does not answer it? I am still getting back to why is there not an incentive on the aircraft contractor to redistribute his excess stocks-why is there not an incentive? |