DoD procurement practice then and now: A public versus private sector comparison (Part 1)

Posted on August 16, 2007

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Hard evidence is needed to provide an accurate gauge of DoD spending efficiency. This study which examines DoD spending on specific items shows that DoD spends significantly less than their private sector counterparts on similar items. These findings question the widely-held beliefs about the inherent inferiority and inefficiency of DoD purchasing practices. The findings also argue for much more careful research on purchasing and acquisition, so that the likely effects of reforms are known.

Major Joseph Besselman (USAF), Ashish Arora, and Patrick Larkey Purchasing Performance: A Public Versus Private Sector Comparison of Commodity Buying (1999)

In an effort to effectively assess the 2006 DoD Implementation of Strategic Sourcing Initiatives Report, I reviewed a number of different Defense Department studies spanning a period of several years.  This included the above referenced 1999 report that analyzed the differences between private and public sector commodity buying practices.  The reason for this approach is that it created a much broader understanding of how DoD procurement practice has (or hasn’t) evolved over the past 10 year period.  This window of review is considered to be important even to those who are not employed within the public sector, as many pundits now believe that DoD procurement practice generally represents the ideal model for overall “best value” efficiency.

This “time lapsed” look provided a unique insight into defense spending, and the then current attitudes and circumstances that ultimately helped to define DoD policy today.

For example, the 1999 paper identified an anticipated decrease in defense spending (a result of the cessation of Cold War tensions), as a potential problem in terms of supply chain efficiency.  Specifically, with a diminishing budget comes a precipitous decline in “the number of civilians that support the military in critical acquisition or purchasing positions.”  As a result of said reductions in “personnel and procurement funding,” the report emphasized that “process changes” must be implemented to ensure that the DoD will continue to “function effectively.”

Based on the figures the government had available at the time of the report, the DoD had spent $132 billion dollars on goods and services in 1996.  This encompassed 8.7 million contracts.  Ten years later (2006), the DoD’s total expenditure on goods and services was more than $265 billion dollars.

Without taking into account inflationary influences, it is safe to assume that 9/11 and the subsequent war on terrorism has become the present day Cold War, therefore buoying and ultimately increasing spend levels.  However, with the growing pressure to scale down military engagement in areas such as Iraq and Afghanistan it is likely that defense spending will be effected in some way.  The lessons learned from the earlier report may prove beneficial.

In this the first part of the DoD posting, I will highlight a number of the key findings from the 1999 report.  In part two, I will focus my attention on the 2006 Strategic Sourcing Initiative.  The differences (and similarities) should prove interesting for those organizations that are currently evaluating the processes and strategies that will define their procurement practice for many years to come.

It is important to note that the Strategic Sourcing report is an “official” undertaking that was initiated in 2005 by the Office of Management and Budget (OMB).  The OMB directed federal agencies “to leverage spending to the maximum extent possible through strategic sourcing.”

Conversely, and even though the authors of the 1999 comparison were rigorous in their adherence to generally accepted methods of gathering and analyzing data, the report nonetheless included a disclaimer.   Specifically, the disclaimer indicated that “the views expressed in the paper are those of the authors and not the official views of the U.S. Air Force or CarnegieMellonUniversity.”  That said the DoD still fully cooperated with the research team, surprisingly granting access to what many considered to be sensitive data.

Initial obstacles

As a result of the prevailing climate in which purported DoD procurement inefficiencies contributed to the public’s persistent belief that tax dollars were routinely being wasted, the 1999 report’s authors encountered several road blocks in their efforts to reliably gather pertinent data.

These included: 

  1. The “myriad abstruse rules and procedures” government buyers had to follow to purchase items.

  2. The difficulty in comparing items of like makeup.  The report cited videotape recorders as an example, indicating that the units utilized in military jet aircraft were different from those purchased by the regular consumer.

  3. The media’s “exploitation of past anecdotes of alleged incompetent buying” (i.e. the $436 hammer) fueled the general atmosphere of fear amongst DoD sector personnel.  Throughout the report, the study’s authors made reference to the concerns surrounding the expectation that their findings would portray DoD personnel in an unfavorable light.  What was interesting is the authors’ indication that this fear was actually perpetuated by the “leadership within the DoD itself.”

  4. The reluctance on the part of some commercial entities (suppliers) to participate based on the belief that the data associated with their sales activities was of a proprietary nature.

In an effort to address the above concerns and ensure the required access to critical data, the majority of report participants were not identified.  This commitment to confidentiality the authors’ believed was “essential” as it alleviated the fear on the part stakeholders that their practices and outcomes would prove embarrassing or in the case of suppliers undermine their competitive position.

Stakeholder reluctance combined with an ever increasing level of public cynicism regarding institutional creditability and performance, a condition that was fueled by highly publicized “incidences” such as the 1998 spare parts scandal mentioned in the report, only served to hinder productive action.  This, the authors claim had unnecessarily shifted the focus away from what they referred to as “the big picture” which they determined was the large dollar expenditures.

While I am inclined to agree with the assertion that a continuing climate of mistrust is largely unproductive as it impedes open and honest communication (the “autopsies without blame” principle referenced in Jim Collins’ book Good to Great comes to mind), the admonition to solely focus on “big picture purchases” to a certain extent undermined the authors’ overall neutrality.  This was an important (and fortunately the only) misstep in a paper that generally delivered valid findings as it could to the casual reader suggest an attempt to justify poor performance in other areas.  Areas which unfortunately tended to grab the biggest and most sensational headlines.

The $436 hammer

One of the key findings in the report indicated that as the dollar value of a purchase increased, the level of attention to transaction details also improved thereby enabling the DoD to consistently achieve “best value” results.

And while there were instances of “embarrassing purchases by the DoD” such as the $7,000 videotape recorders (Gansler, 1978), the $7,600 coffee pots, and $9,600 allen wrenches (Comeau, 1984), the overall data clearly demonstrated that the DoD paid 41.5 percent less than the average commercial sector organization for the commodities that were included in the research.  (Note: given that the vast majority of DoD purchases were for commodities, “the three sectors that were targeted for data collection” included electronics, engines and commercial-off-the-shelf (COTS) software components.)

Ironically, the report’s authors contend that government efforts to reform DoD buying practices such as the Federal Acquisition Reform Act (FARA) of 1996 had actually contributed to the poor purchasing results in certain areas of spend.

For example the report maintains that “many in industry have responded to FARA by listing traditionally military or noncompetitive parts in a commercial catalog, calling them commercial items and offering them for sale to the public – daring government procurement officers to ask for cost information.”

In short, government suppliers artificially inflated prices by making DoD indigenous commodities “available” to the buying public.  While there was virtually no likelihood of ever making a sale to a non-DoD customer, this significantly increased the DoD buying price.  Examples the report cited included the 108 electrical bells that prior to FARA cost $46.68 but at the time of the report’s publication was being procured at a price of $714 (a 1,430 percent increase); or the 187 set screws with a pre-FARA cost of $0.57 being acquired at a cost of $75.60 (a 13,163 percent increase).  (Note: the data that was used to identify the above pricing discrepancies was collected prior to the implementation of the policy changes associated with FARA.  As a means of addressing the practice of classifying a DoD indigenous commodity as a pseudo consumer product, the report recommended that the definition of a commercial item should be restricted to commodities in which a significant quantity has been sold to the public.)

Actual Numbers

Employing what was considered at the time to be a “new method of analysis,” the report’s authors relied on a weighted price difference methodology to measure DoD purchasing performance.

Unlike the “un-weighted” method that was used previously, the weighted approach took into account “the total dollar value of a purchase” in relation to overall volume.

While the results obtained using an un-weighted analysis indicated that the DoD paid 20.7 percent more than their commercial counterparts had for the same commodities, the weighted outcome showed that the DoD “outperformed commercial sector organizations” by 41.5 percent.  In hard dollars this translated to the DoD paying $99.9 million for the approximately 831,000 items that constituted the sample commodity base.  Their commercial counterparts paid a wholesale price of $188.7 million for the same quantity of items.  As a point of reference a Retail pricing figure of $270.5 million was also listed.  (Note: a more comprehensive breakdown of the methodologies employed in the study as well as the corresponding table is available as part of the report.  If you would like a copy, send me an e-mail at jhansen@procureinsights.com with “DoD Report” in the subject line.)

Supplier Engagement

In addition to the expressed desire on the part of the DoD to obtain the best possible pricing at a level that still “pays a fair profit” to its suppliers, there were other goals the report highlighted including the importance of supporting the SME and Minority-owned business community.  In an effort to meet what was categorized as “sometimes conflicting goals,” the DoD at the time had employed a series of procedures that was meant to maximize stakeholder benefits.  These included the use of cost and pricing data, the aggregation of buys to leverage market power, and detailed supplier analyses.

For example, the objective of aggregating buys to leverage market power emphasized the importance of forecasting in terms of the benefits the DoD could derive from a “just in time” delivery strategy.

This approach which according to a 1993 article titled Tailored Logistics: The Next Advantage (Harvard Business Review) by O’Conor, Rawlinson and Fuller emphasizes that cost minimization is the result of effective throughput management and therefore creates a win-win scenario for both the buyer and its suppliers.

This included the opportunity for the DoD to take advantage of volume discount pricing while reducing the necessity to carry inventory.  In a 1998 Case Study a process known as the Product Compression Function (PCF) enabled a Defense-related client to reduce their overall inventory levels at multiple warehouses by 90 percent.  Beside the obvious reduction in costs at the component level, savings associated with soft cost reductions such as housing and inventory management were also realized.  However, the PCF approach would not have been successful if a more efficient sourcing and fulfillment mechanism wasn’t firmly in place.  That said the 1999 report indicated that this was an “area ripe for improvement across the DoD,” since effective forecasting practices were not adequately in place for all product lines.

Synopsis

The 1999 report attempted to answer the question “is there systematic evidence to support public beliefs” concerning the efficiency (or inefficiency) of purchasing practices within the DoD.  As indicated earlier, this is a question that can reasonably be extended to include both public and private sector organizations.

The importance of this exercise I believe is not so much tied to proving that the DoD buys efficiently (clearly the data effectively demonstrated that there is an obvious gap between perceptions and reality), but that it provides the impetus to question, develop and implement where required superior procurement practices.  And I believe that it is this very mindset that has indirectly led to the 2006 Strategic Sourcing Initiative.

 

Posted in: Defence Procurement