SMALL BUSINESS PARTICIPATION IN MILITARY

PROCUREMENT

MONDAY, MAY 7, 1951

CONGRESS OF THE UNITED STATES,
SELECT COMMITTEE ON SMALL BUSINESS,

UNITED STATES SENATE, AND SELECT COMMITTEE ON

SMALL BUSINESS, HOUSE OF REPRESENTATIVES,

Washington, D. C. The joint committee met, pursuant to call, at 10 a. m., in room 457, Senate Office Building, the Honorable John J. Sparkman (chairman) presiding.

Present: Senator John J. Sparkman, Representatives Joe L. Evins, and Abraham J. Multer.

Also present: John E. Newby, special counsel, Senate committee; Victor P. Dalmas, executive director; Ernest L. Stockton; and Duncan Clark, staff members, House committee; John Fisher, secretary to the Honorable Leverett Saltonstall, United States Senator; Donald G. Herzberg, legislative assistant to the Honorable William Benton, United States Senator; and John J. McCarthy, executive secretary to the Honorable Edward J. Thye, United States Senator.

The CHAIRMAN. Let the committee come to order, please. There are many other committee meetings this morning. In fact, it will make it difficult for many of our members to be here. However, we do hope to proceed with those that are present. I hope that others will come in in the course of the hearing.

The purpose of these hearings is to determine whether adequate steps are being taken during the present emergency to insure that small business is receiving a fair share of the contracts being awarded and to study the problems the small businessman faces in his efforts to participate in the defense program.

Material shortages which followed in the wake of accelerated military procurement in many cases made the small manufacturer's plight a desperate one. He turned to seek Government contracts as one means of survival. In many instances, toward the end of 1950, he was achieving some little success in obtaining a share of the dollars the Government was spending for procurement. The contracts he received were not being awarded him on the basis of his need for business, but were coming to him strictly on a competitive basis.

However, as the small man's need for DO-rated materials increased and as Government spending rates rose, his share of the total amount spent appeared to be decreasing. Early in 1951 there was an abrupt switch in purchasing methods, and the competitive system was no longer being used for a majority of the purchases. Instead, negotiated buying accounted for most of the procurements, and the little fellow had to learn all over again how to do business with the Government.

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He found that the Department of Commerce daily listing of invitations to bid was no longer a long list and that the weekly list of contract awards published by the Department of Commerce did not indicate to him where he had best turn to obtain subcontracts because the value of the awards was no longer published.

In short, he came to our committee saying that he could not find out what was being purchased and, therefore, that he was in no position to say he was being unfairly omitted from procurement activity. He felt that the purchasing officers were too busy to give his case more than cursory attention, and that he could do little on his own to improve his position under the circumstances.

The small-business man followed instructions to turn in to procurement centers complete data as to his company's facilities, ability to produce particular items and financial rating. Thereafter he found that his usual selling methods did not suffice. Due to rapidly developing material shortages he could not afford to wait until some indefinite future time before he was to be given, for the first time, a chance to bid. He asserted that the use of small facilities apprently had not been seriously considered as important to over-all military planners.

On the other hand, we were aware that on December 18, 1950, the Secretary of Defense issued instructions to the Secretaries of the Army, Navy, and Air Force that efforts should be made to broaden the industrial base of procurement using the negotiated method to achieve this end. We feel that enough time has now elapsed to permit a fair assessment of the success which can be expected from the implementation of that directive. We hope to learn during these hearings the extent small business has benefited as the result of this policy.

At the conclusion of joint sessions with the Select Committee on Small Business of the House of Representatives, the Senate committee will hold a series of hearings on individual cases to study the small-business man's position as a result of current military procurement policies.

That is a statement relating to the hearings that has been prepared to represent the two committees.

Congressman Joe L. Evins of Tennessee is here acting chairman of the House Committee on Small Business in the absence of the chairman, Congressman Wright Patman, who, because of illness in his family, had to go to Texas.

Congressman Evins, I wonder if you have anything to add to that statement?

Representative EVINS. Mr. Chairman, we have a statement which we would like to make at this point, and have included in the record, if we may.

The CHAIRMAN. We would be glad to have it.

Representative EVINS. I am sure that my colleagues in the House. appreciate this opportunity to join with the Senate Small Business Committee in order that we may expedite these hearings and thus avoid duplication of effort.

When the House Small Business Committee was reconstituted February 2, 1951, the committee was directed to conduct a study and investigation into the problems of small business during the continuance of the national emergency.

In the succeeding months, the committee has done its best to comply with these instructions. Field hearings have been held in 23 cities and 18 States, thus far. Approximately 500 small-business men have appeared at these hearings to provide the committee with specific, down-to-earth information regarding their current problems. Many problems have been presented to the committee in the course of these hearings.

Everywhere the committee has gone, however, it has found that no problem facing the Nation's small-business man today is more important than that of gaining an equal opportunity to participate in Government procurement, particularly procurement by military agencies.

The impact of the Government's procurement policies upon the Nations' small-business economy has been intensified many times during the present mobilization period. Selling to the Government has become a matter of life or death to thousands of small-business men who normally have little interest in obtaining Government contracts. These businessmen have been forced, in greater or lesser degree, from the civilian market because of shortages of material, and their only hope of survival lies in procuring contracts in the defense effort. Full utilization of these small-business concerns by military procurement agencies is important, not only from the standpoint of maintaining small-business economy, but in aiding the civilian economy as well.

The committee appreciates the opportunity to join with the Senate Small Business Committee for further exploration of these problems, Mr. Chairman; we also wish to express our appreciation to the distinguished witnesses who will appear before this committee this morning and on succeeding days. We are confident that the agencies and individuals concerned with Government procurement have a sincere interest in the Nation's small-business men and their problems. However, this interest must be translated into definite action at the level of various Government procurement offices before the present problems of small-business men can be alleviated. This is the objective we hope to achieve.

Increasing the participation of small-business men in the defense effort certainly is an important goal. It is hoped that these hearings will produce information which will bring about that realization.

Thank you, Mr. Chairman.

The CHAIRMAN. Thank you.

This morning we are hearing from the Munitions Board. We are glad to have with us Mr. John D. Small, Chairman of the Munitions Board. Accompanying him are Mr. William J. McBrian, Vice Chairman for Supply Mangement of the Munitions Board, Rear Adm. M. L. Ring, Military Director for Supply Management, Munitions Board, and Commander Philip Ashler, Acting Chief, Office of Small Business, Munitions Board.

Mr. Small, will you and the gentlemen with you come around, please?

We are glad to have you; all of you.

STATEMENT OF JOHN D. SMALL, CHAIRMAN, MUNITIONS BOARD, ACCOMPANIED BY WILLIAM J. McBRIAN, VICE CHAIRMAN FOR SUPPLY MANAGEMENT, REAR ADM. M. L. RING, MILITARY DIRECTOR FOR SUPPLY MANAGEMENT, AND COMMANDER PHILIP ASHLER, ACTING CHIEF, OFFICE OF SMALL BUSINESS, MUNITIONS BOARD

Mr. SMALL. General Marshall, as you know, because of other commitments, was unable to be here, and by other arrangement with you, Mr. Chairman, I am talking from the point of view of the Department of Defense.

I have a prepared statement which, with your permission, I would like to read.

The CHAIRMAN. You go right ahead, in your own way, Mr. Small. Mr. SMALL. Thank you, sir.

Mr. Chairman and members of the Senate and House committees. I welcome this opportunity to appear before your committees, to discuss with you the Department of Defense small-business program and its related problems. I shall confine my remarks in this statement to a brief discussion of the progress that has been made, together with a general discussion of our plans for the future. Should I fail to present some particular problem in which any of you gentlemen might be interested, I shall be happy to discuss it at the conclusion of this statement.

Within the Department of Defense we are fully aware that one of our most important and pressing problems is that of small business. It is a fact that the services have a selfish interest in helping small business, because they know they need this capacity. We are doing something constructive about it. Much has been done already. In my opinion we are further along now than we were at a comparable period in World War II. However, much more remains to be done, and I assure you that we will continue our efforts with sincerity and firm purpose.

It is probably advisable to point out in the beginning that there are several major factors in the present situation which do not seem to be always fully recognized.

One major factor is that the actual volume of military procurement is considerably less than is popularly thought. Many businessmen have told me that they expected munitions contracts to flow out at the same rate as at the peak of World War II. On the contrary, as you well know, deliveries of military equipment during the months ahead are planned at lower levels than the World War II peak.

Another major misconception is that military procurement can be easily and quickly substituted in each and every plant where civilian production is adversely affected by material shortages. I can assure you that this is not correct. For example, in order to provide aluminum for aircraft, and other munitions, aluminum has had to be diverted from thousands of other products, and from the plants that produce them. It is unfortunate, but true, that this diversion of aluminum to aircraft has freed far more production capacity than can possibly be taken up by the other munitions programs. The same kind of situation holds true with other materials.

I know that the committees will be interested in our latest compilation of prime contract awards to small business. During fiscal year

1950, $1,310,615,000, or 24.5 percent of the annual total was awarded to small business. However, during the first 9 months of fiscal year 1951, through March 31, small business has been awarded a total of $3,394,380,000 or almost three times the amount they received during the entire fiscal year 1950. This represents 21 percent of the total awards.

While the declaration of an emergency in December 1950 greatly increased the use of negotiation as a method to procurement, it is interesting to note that the percentage of awards to small business have risen steadily during the first quarter of this calendar year. In January small business received 16.6 percent of awards; in February 21.6 percent, and in March 25.9 percent.

A break-down of departmental awards to small business for the months of January and March of this year indicates a trend which we hope will continue. The Air Force awarded 11 percent of its total procurement in March to small business as against 10.2 percent in January. The Army awarded 36.3 percent in March as against 22.4 percent in January; and the Navy awarded 21.5 percent in March as compared to 12.5 percent in January.

During the period July 1, 1950, to February 28, 1951, small business received 67 percent of the number of contracts awarded by negotiation, which represents 12 percent of the dollar value. During February 1951 the small-business share of negotiated contracts remained about the same for numbers of contracts but increased to 17 percent of the dollar value, percentagewise.

It is relatively easy to prepare statistics covering the award of prime contracts to small business. It is very much more difficult to accumulate information concerning the substantial share of munitions work that is going to small business through subcontracts. It is certain, however, that the dollar volume of work going to small business through subcontracts is manyfold the volume going to them through direct contracts.

Subcontracting must be recognized as an effective instrument in the distribution of military procurement to those smaller independent enterprises not equipped to undertake prime contracts. Our efforts have been directed toward aiding those small enterprises normally engaged in the manufacture of civilian products, but now denied the raw materials to continue their line, and who have no existing subcontract arrangement with larger producers. For example, to aid those seeking subcontracts, the Department of the Air Force recently arranged an exhibit of prime contractors in New York City where prints, drawings, and specifications were available to potential subcontractors. This plan, developed by the Air Force, proved so successful that another exhibit was arranged at Chicago last week, and another show sponsored by all three military departments is scheduled in Boston on May 15.

Additional exhibits will be arranged through the cooperative efforts of the Army, Navy, and Air Force at Detroit, Los Angeles, Fort Worth, and other principal cities. The extent of subcontracting is best demonstrated in a recent study of 863 Air Force prime contracts, totaling approximately $5 billion.

The data collected indicated that approximately 75 percent of the subcontracts were awarded to companies employing less than 500. In compiling this information, Air Matériel Command representatives approached 59 major prime contractors in every field of production.