165 2d Session } JOINT COXNXITTEE PRINT BACKGROUND MATERIAL ON ECONOMIC ASPECTS OF MILITARY PROCUREMENT AND SUPPLY MATERIALS PREPARED FOR THE SUBCOMMITTEE ON DEFENSE PROCUREMENT OF THE JOINT ECONOMIC COMMITTEE CONGRESS OF THE UNITED STATES FEBRUARY 16, 1960 Printed for the use of the Joint Economic Committee UNITED STATES GOVERNMENT PRINTING OFFICE 50345 WASHINGTON: 1960 For sale by the Superintendent of Documents, U. S. Government Printing Office Washington 25, D. O. - Price $1.0o JOINT ECONOMIC COMMITTEE (Created pursuant to sec. 6(a) of Public Law 304, 79th Cong.) PAUL H. DOUGLAS, Illinois, Chairman WRIGHT PATMAN, Texas, Vice Chairman SENATE HOUSE OF REPRESENTATIVES JOHN SPARKMAN, Alabama RICHARD BOLLING, Missouri J. WILLIAM FULBRIGHT, Arkansas HALE BOGGS, Louisiana JOSEPH C. O'MAHONEY, Wyoming HENRY S. REUSS, Wisconsin JOHN F. KENNEDY, Massachusetts FRANK M. COFFIN, Maine PRESCOTT BUSH, Connecticut THOMAS B. CURTIS, Missouri JOHN MARSHALL BUTLER, Maryland CLARENCE E. KILBURN, New York JACOB K. JAVITS, New York WILLIAM B. WIDNALL, New Jersey JOHN W. LEHMAN, Clerk and Acting Executire Director SUBCOMMITTEE ON DEFENSE PROCUREMENT PAUL H. DOUGLAS, Illinois, Chairman SENATE HOUSE OF REPRESENTATIVES JOHN SPARKMAN, Alabama WRIGHT PATMAN, Texas JOSEPH C. O'MAHONEY, Wyoming RICHARD BOLLING, Missouri JACOB K. JAVITS, New York THOMAS B. CURTIS, Missouri WILLIAM B. WIDNALL, New Jersey RAY WARD, Professional Staff Member RICHARD J. NEWMAN, Professional Staff Member II LETTER OF TRANSMITTAL FEBRUARY 12, 1960. To Members oj the Joint Economic Committee: Submitted herewith for the consideration of the members of the Joint Economic Committee and others is a report which presents "Background Material on Economic Aspects of Military Procure- ment and Supply." This study was prepared by temporary staff members, Ray Ward and Richard J. Newman, in connection with the Subcommittee on Defense Procurement's hearings on "The Impact of Defense Procure- ment," which were held January 28-30, 1960. The materials contained in this report provide a most comprehensive and useful examination into the economic aspects of the vastly com- plicated programs and systems of military procurement and supply. The findings and conclusions are those of the authors. The com- mittee indicates neither approval nor disapproval by publication of this committee print. PAUL H. DOUGLAS, Chairman, Joint Economic Committee. m CONTENTS Page Introduction -------------- 1 Summary of report ----- --------------------- 3 Part I. The military supply program -19 The size of defense supply operations -20 The functions which comprise defense supply operations -32 The present organization of defense supply systems 32 The present assignment for procurement - - -- ---- 35 The chronology of important events in defense supply management 37 Part II. The Department of Defense supply management Problem areas 43 Part III. An assessment of the single manager plan 45 Single manager system 45 Status of the program 45 Development of the program - --- - 46 Various views on the merits of the single-manager plan -47 Possible extension of the single-manager plan in commodity areas - 51 Possible extension of the single-manager plan in service type areas 58 Part IV. An assessment of other techniques of integrating supply manage- ment -63 Single department procurement assignments 63 Decentralized acquisition of material (local purchase) 65 Procurement and supply support by GSA-- 68 Plant cognizance procurement and weapons system contracting 71 Part V. What to do about unification of common-use supplies and services 73 Part VI. Contracting -- ----- --------------------------------- 83 Part VII. A look at the Armed Forces Supply Support Center 101 Part VIII. Excess property, surplus disposal and stockpile programs- 113 Part IX. Government competition with business program in the executive branch ------------------- 131 Appendix material - 137 V BACKGROUND MATERIAL ON ECONOMIC ASPECTS OF MILITARY PROCUREMENT AND SUPPLY INTRODUCTION Following President Eisenhower's state of the Union message to the 2d session of the 85th Congress in which he called for "real unity" in the Department of Defense, the President submitted to Congress on April 3, 1958, his proposed defense reorganization plan. A primary purpose of this reorganization plan was to strengthen the authority of the Secretary of Defense over the military departments. The President stated in his message that one effect of the "separately administered" concept of the National Security Act was to "impede such techniques for the increased efficiency and economy as the single manager plan" in the Department of Defense. The Congress not only modified the "separately administered" clause but it also adopted the McCormack-Curtis amendment to the Department of Defense Reorganization Act of 1958. This legislation removed any possible doubt as to the authority of the Secretary of Defense to integrate supply and service functions when it would be in the best interest of Government. Moreover, the amendment was a renewed expression of the intent of Congress that positive and continued action be taken by the Secretary of Defense to eliminate duplication and waste in military supply and service programs and to develop ways to bring about efficient performance in this area. The McCormack-Curtis amendment (sec. 3(a)(6) of Public Law 85-599) reads as follows: Whenever the Secretary of Defense determines it will be advantageous to the Government in terms of effectiveness, economy, or efficiency, he shall provide for the carrying out of any supply or service activity common to more than one military department by a single agency or such other organizational entities as he deems appropriate. The sheer magnitude of defense procurement, supply, and surplus disposal activities is without parallel in any other phase of our social or economic life. They are a major determinant in the functioning of the Nation's economy. The purpose of this study is to appraise in the light of the Defense Reorganization Act of 1958 the steps which have been taken or are in the process of being taken to improve the management of the principal support functions in the Department of Defense. It is prepared as background information for hearings by the Joint Economic Committee. This study does not encompass problems of military strategy, the management of military forces, nor related development of weapons systems. Nor does it deal with the broad problems of the economic consequences associated with dis- armament. Rather, the study is focused on the purely economic and budgetary issues involved in the way the Government manages the defense outlays, which consume 58 percent of the budget. _ ~~~~~~~~~~~~~~~~1 SUMMARY OF REPORT A. MAGNITUDE OF DEFENSE PROCUREMENT In the period just prior to the Korean conflict, defense needs were a relatively smaller element than at present in the economy, amounting to $13 billion in fiscal year 1950, or about 5 percent of the gross na- tional product. Since then military requirements have absorbed at least double the proportion of the Nation's product. The current rate of major national security expenditures is $45.7 billion and accounts for 58 percent of Government's entire budget expenditures. This spending consumes more than 9 percent of our gross national product and is a significant determinant in the functioning of the economy. From 1950 to 1959 while the Nation's volume of business expanded 76.5 percent, Department of Defense expenditures ex- panded 246.2 percent. The Department of Defense (DOD) employs 3.6 million military and civilian persons and has real and personal property of $150 billion on the basis of cost. Personal property alone is valued at $118 billion and is made up of 3.4 million items. It requires 585 million square feet of space throughout the world to store the Department's vast inventories. And to keep the defense arsenal supplied with new weapons and to replenish supplies, it currently takes 6.7 million "procurement actions" to buy material at an annual expenditure of $23.9 billion.' From fiscal years 1950 to 1959, there were armed services "procurement actions" totaling some 38 million separate transactions having a dollar volume of $228.4 billion. About $26.7 billion or 23 percent of personal property inventory has recently been identified by the Department of Defense as being in surplus, or long supply of present defense needs. The DOD has an accelerated surplus disposal program now underway to dispose of about $10 billion annually to rid itself of these tremendous stocks. The net return to the Government on the DOD surplus disposal sales is less than 2 percent of the acquisition cost. B. BACKGROUND The Congress and other interested groups have been critical of the Defense Department systems for computing requirements, contracting, cataloging, storing, distributing material, and surplus disposal over the past 10 years. They have urged the Defense Department to find new and more productive ways of integrating these systems in order to obtain the economies which are believed possible. These recommen- dations have included- I See footnote, table 27, p. 94. 3 4 MILITARY PROCUREMENT AND SUPPLY Integrating requirements ("what," "how much," and the "way" they are procured); Integrating the use of assets; Integrating the use of facilities; Integrating the organizations concerned in managing common supplies and services. Advocates of integrated supply consider the following areas most adaptable to consolidated management: 1. Areas of common supply Of the 3.4 million items which have been identified under the Fed- eral catalog system, items which can be included within the various definitions of "common supply" range from 14 to 52 percent. A recent analysis in the DOD of the catalog on an item-by-item basis reveals that only 14 percent has been identified to date as common in two or more services. But a still broader definition covers approxi- mately 52 percent of the items by including all categories which in themselves are of similar manufacture or fabrication but differ only superficially, as in color, finish, and markings. For example, items in the Federal supply group for administration and housekeeping sup- plies total 25,116 items.