DOD PROCUREMENT PRACTICES

THURSDAY, SEPTEMBER 29, 1977

U.S. CONGRESS,

JOINT COMMITTEE ON DEFENSE PRODUCTION,

Washington, D.C.

The Joint Committee met at 10 a.m.. pursuant to call. in room 5302, Dirksen Senate Office Building, Senator William Proxmire (chairman of the Joint Committee) presiding.

Present: Senator Proxmire and Representative Evans.

OPENING STATEMENT BY SENATOR PROXMIRE

The CHAIRMAN. The committee will come to order.

Today we begin 2 days of hearings on Department of Defense procurement policies and how these policies can affect the ability of American industry to produce vitally needed defense products in a timely and efficient manner.

Within the past year there has been a great deal of concern expressed about this problem, both within the Government and outside the Government. We have heard that there may be substantial erosion of our industrial capacity and that the ability of the Government to obtain what it needs may have suffered.

At the same time, some Government officials have stated that, in some sectors at least, we may have a costly excess capacity of suppliers and that this excess capacity may be costing the taxpayer nearly a half-billion dollars each year.

There have been proposals to increase competition for defense procurement, while other proposals, such as the recent DOD report on capacity utilization in the aircraft industry, might result in less competition.

Some people have stated that foreign military sales improve the condition of the U.S. industrial base by lengthening production runs and assuring the availability of industrial production sources that might otherwise be forced to shut down. Others have said that foreign military sales can hurt the production base and the readiness of the American military by diverting needed productive capacity and by encouraging possibly unneeded expansion.

There has also been criticism of defense decisions about the types of weapons that will be bought. Many have contended that the Department is buying too many overly sophisticated weapons in view of budget constraints.

The condition of the industrial base and the DOD policies to utilize its capabilities are crucial to our defense posture. If the Department

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is unable to obtain what it needs or if it cannot afford what it is getting, then it cannot support our military objectives.

The two issues are closely related and cannot be considered separately. The condition of the defense industrial base and the availability of suppliers to meet defense needs can have a great effect on defense policies. On the other hand, it is no less true that defense procurement policies can have a significant impact on the ability of industry to meet defense needs.

The Banking Committee will take over this committee's jurisdiction next month. I happen to be chairman of both. The Banking Committee will absorb the jurisdiction of the Joint Committee on Defense Production. I should make it clear to everyone that we are sensitive to our jurisdiction. The Armed Services Committee clearly has jurisdiction over specific procurement: should we buy the B-1, should we buy a particular kind of tank, and so forth.

Our committee's jurisdiction is one that pertains to the economy as a whole and the capability of the economy to meet our military needs as well as our industrial needs.

I might point out that many people feel that the reason the North won the War Between the States is because they had the industrial base. They didn't have the same kind of military competence of the South but they had the military base. In World War I-and in World War II especially-the tremendous superiority of the American economic system, many people feel, was the decisive factor.

Our economic capability and industrial base is fundamental to our success, every bit as fundamental as any tactical advantage we might have at the moment through particular weapons.

So the committee is not undertaking these hearings simply for the sake of analyzing defense policies. The condition and capabilities of the industrial base is basic to Defense Production Act review. The Defense Production Act provides the general framework for both day-to-day procurement of defense needs and for wartime mobilization planning.

If the industrial base, for whatever the reason, cannot provide the support for foreign and military policies or if it can meet these needs only through the most extreme actions, legislative action may be

necessary.

At today's session we will hear from Mr. Thomas V. Jones, chairman of the board and chief executive officer of the Northrop Corp. Two other witnesses who were initially scheduled to appear today were regrettably forced to cancel their scheduled appearances at the last minute.

Mr. Jones has been with the Northrop Corp. since 1953, when he began employment as assistant chief engineer. He was named president of the company in 1959 and chairman of the board in 1963. Prior to his employment with Northrop Mr. Jones was a staff member of the Rand Corp. and a technical adviser to the Brazilian Air Ministry and, I guess, since 1963 has had every top title within the Northrop Corp.

We are delighted to have you here as our witness, Mr. Jones. Go right ahead.

STATEMENT OF THOMAS V. JONES, CHAIRMAN AND CHIEF
EXECUTIVE OFFICER, NORTHROP CORP.

Mr. JONES. Thank you. Mr. Chairman and members of the committee, I appreciate this opportunity to present my views on defense procurement policies and the condition of the industrial base.

It is becoming increasingly clear that the next decade is going to place a very great burden and responsibility on the Congress, our Armed Forces and on the defense industry. The Soviet Union has been moving ahead in military strength and is challenging our technological supremacy, while we face unprecedented social and economic demands at home. Meeting these challenges simultaneously will take creative, innovative and dedicated performance on the part of all of us.

The Congress faces a major task in insuring maximum defense within the available budget on a long-term and continuing basis. If this is to be accomplished, it is absolutely essential that we have budgetary integrity and a sound, disciplined system of defense procurement. When this occurs, I believe that the private sector will be able to bring all of its strengths to bear and major improvements will result.

Clearly the defense procurement system is not working as well for our Nation as it should. Widespread cost growth is preventing the military services from procuring weapon systems in the quantities deemed necessary by our defense planners; contractual disputes exist between Government and various segments of the defense industry; capital investment in modernizing plant and equipment is inadequate; there is concern that the industrial base is not structured to meet the new kinds of threats envisioned by our military analysts and there is concern as to the nature and level of U.S. foreign military sales.

Admittedly these are complex problems and their solution must be dealt with against the backdrop of competing claims on the Nation's resources. But one thing is clear: For weapon systems planned for inclusion in the force structure, solutions will require more accurate planning, more accurate prediction of budgetary requirements and more clear-cut assignment of the responsibility for implementation, with all participants in the process held accountable for the results. That means we must focus on integrity in planning, in budgeting and in implementation.

Great progress has been made recently in establishing mechanisms to carry out these goals. The defense budget process now requires the Defense Department to prepare a complete plan covering total research and development, procurement and maintenance and operating costs for weapon systems going into force structure. Such plans are presented to the Congress in seeking authorization and appropriation to initiate programs.

Nevertheless the fundamental problem remains that, even though a plan has been made and agreed upon, there is still a record of cost overruns, reprogramings, and changes that have a cascading effect on national security.

Reports to Congress on the status of the country's major weapon system procurement programs continue to reveal excessive cost growth

in these programs over and above the impact of inflation. Even with reprograming, the number of units of these major weapon systems being delivered is significantly less than was originally planned, while the reprograming actions taken to cover overruns frequently disrupt well-run programs.

Moreover, with the defense program as a whole keyed to the full number of units originally planned, manning, basing, and other supporting programs are often started and then rescheduled or stopped. Industrial facilities planned for large quantity production are utilized at a fraction of capacity or put on a standby basis.

Hence the reduction in defense capability which results from the failure to deliver the number of units planned at the projected cost is further amplified, since the rest of the defense establishment is keyed to the original force structure plan. This disruption is perhaps the largest single cause of waste in the Defense Department.

This record has become so repetitive that there seems to be a tendency to consider cost overruns, schedule delays, and technical disappointment part of the price we must pay for national security.

This is simply not the case. There is no fundamental reason why defense procurement cannot be as efficient as any element of the private sector. The Government, the public, the investment community, and the defense industry itself must abandon the notion that defense is somehow different, that it cannot be confined within the same standards of performance by which we measure the rest of our market economy.

The sound practices of the competitive environment that have worked so well to achieve the social and economic standards that we enjoy today can and must be used to contribute to meeting our defense requirements efficiently.

What is missing is enforced discipline in the budgetary process. For example, budgeting often is based on planning estimates supplied by industry; but, in the absence of binding contracts, industry is not held accountable for the accuracy of those estimates.

Unless the procurement plans submitted to Congress for inclusion in the force structure budget are based on firm, accurate, and binding cost quotations, they carry little validity and cannot contribute to budgetary integrity.

Decisions to purchase hardware for force structure should be made. in the presence of competing alternatives and only if each competing company has made a firm and binding contractual commitment it is prepared to meet.

I do not mean merely that these choices must be made between companies competing to build the same system. Defense procurement decisions must continue to consider alternative ways to accomplish the military task-different types of weapon systems with different capabilities and characteristics that would be produced by different companies. But to qualify for force structure procurements, a defense contractor should have demonstrated capability in plant, equipment, organization, and experience and must have the financial strength to accept responsibility for any risks inherent in its bid. This is analogous to requiring a bond of a building contractor.

Adherence to this sound procurement practice requires that military needs be sufficiently defined so that a binding fixed-price-type con