During the next 2 years we hope to increase the savings from these sources by almost 50 percent. 2. Buying at the lowest sound price: How we buy has almost as much effect on the size of the procurement appropriations as what we buy. In fiscal year 1965 our procurement costs will be over $650 million less than in 1961 because of two actions: (a) Price competition: Congress has repeatedly specified in legislation that we should employ competition in defense purchasing to the maximum practicable extent. Prior to fiscal year 1961 we did now know what part of our procurement dollar was being awarded on the basis of competitive bids. Today we have this information within 20 days after the close of each month for each of the 90 principal procurement agencies of the Department. This has made it possible to determine how well each of these agencies is performing, and to institute training programs to improve their performance. By the end of this month, 19,400 procurement personnel-the great majority civilian-will have attended joint procurement training courses conducted at Fort Lee, Va., and Wright-Patterson Air Force Base, Ohio. Here are the results: competitive procurement has been increased since fiscal year 1961 from 32.9 to 38.2 percent-and we are well on the way to achieving our end objective of 40 percent. CONTRACTS AWARDED ON BASIS OF COMPETITION AS A PERCENT OF TOTAL CONTRACT AWARDS In fiscal year 1963 over $900 million in new competitive awards resulted from this increased rate of competition. For each new dollar bought competitively, the taxpayer saves an average of 25 centshence, in 1963 defense procurement costs were $237 million lower by virtue of allowing the free play of private enterprise to set the lowest sound price to the Government. The biggest savings to date have been in the purchase of spare parts for aircraft. (b) Reduction in cost-plus-fixed-fee contracts: The second major accomplishment in how we buy has been the shift of over $4 billion away from CPFF contracts (where the Government pays all of the costs plus a guaranteed fee) into incentive and fixed-price contracts. We estimate that our procurement costs in fiscal year 1965 will be $400 million less because of the reduction in CPFF contracts from 38 percent in fiscal year 1961 to 12.5 percent this year. COST PLUS FIXED FEE CONTRACTS AS A PERCENT OF TOTAL CONTRACT AWARDS '56 '57 '58 '59 '60 '61 '62 '63 '64 '65 Credit for this significant improvement goes to the thousands of technical and contracting personnel who have learned how to plan more precise statements of requirements as the basis for negotiating tighter contracts. One other action which may interest this committee is the issuance of a policy recently by Secretary McNamara prohibiting awards to contractors who do not have proven management, technical, and financial competence. 3. Reducing operating costs: The third segment of the cost reduction program is concerned with the elimination of unnecessary and duplicating facilities and functions within the Defense Establishment, as well as between DOD, other Federal agencies, and industry. About one-third of the cost reduction program is focused on these efforts which, in fiscal year 1965, will reduce our budget by $640 million. These efforts may be of greatest interest to this committee since they are concerned with better utilization of defense logistics manpower. The largest single gains have been made in reducing or closing unneeded defense installations. In his 1961 state of the Union message, President Kennedy said: We must continually review our nearly 7,000 military installations in the light of our needs now and in the event of emergency. Those bases and installations which are no longer required must be inactivated, and disposed of where feasible, and I have so directed the Secretary of Defense * I am well aware that in many cases these actions will cause hardships to the communities and individuals involved. We cannot permit these actions to be deferred, but the Government will make every practicable effort to alleviate these hardships, and I have directed the Secretary of Defense to take every possible step to ease the difficulties for those displaced. Since that time, 556 actions have been taken, which, when completed, will Release 1,100 square miles of real estate for nondefense uses. Reduce or reassign 81,600 manpower spaces (32,800 civilian and 48,800 military). Produce annual O. & M. savings of $551 million. These actions cover a wide range of consolidations and inactivations. The largest group to date are associated with elimination of unnecessary storage and warehousing operations due to the shrinkage in our inventories of $12 billion since 1957. All but two of these actions have or will result in the elimination of unnecessary work. In ony two cases is the work being turned over to private enterprise: Naval Ordnance Plant, York, Pa. This plant was sold last November to the American Machine & Foundry Co. to complete the remaining Navy workload and diversified the plant-which was being used at only one-third of its capacity. AMF hired 927 of the civil service workers out of the 1,142-without loss of salary, seniority, and other benefits. Of the remaining 215 employees, all but one has either retired or, with DOD assistance, found other employment. Had this action been delayed, we would have had to begin a full phaseout of the plant with no other defense employment available in the locality. Watertown Arsenal, Mass. This closure will be extended over 312 years (September 1967) to ease the impact on employees and the community. Secretary McNamara has guaranteed each of the 1,836 employees whose jobs will be eliminated another job opportunity. The reason for this action is that the Army no longer has a requirement for the arsenal production facilities (when present programs are completed) and any future work of the type which could be allocated to the arsenal can be performed by private industry on a fully competitive basis, at costs at least 25 percent lower than the arsenal's costs. Annual savings of $5.3 million will result from the closure. Other examples of reduced operating costs since fiscal year 1961 include The creation of the Defense Supply Agency which in fiscal year 1965 will perform the procurement, storage, and distribution of 1.5 million common supply items with 7,500 fewer civilian personnel than previously required. DSA has just been assigned responsibility for consolidating field inspection and contract administration offices of the military departments-now staffed by 20,000 personnel-and a further manpower reduction of 2,000 spaces is anticipated over the next 2 years. In the field of equipment and real property maintenance, savings of $147 million are reflected in the fiscal year 1965 budget. This saving includes reductions in the use of contract technicians (about which I will comment further), greater use of tenant maintenance of family housing, and elimination of unnecessary inspection and repair of aircraft and major end items. One of the more interesting sources of savings in aircraft maintenance is the repair in our shops of parts which were being discarded and replaced with new parts. The Army, for example, is repairing for $20 the exhaust diffuser for the T-53 aircraft engine in lieu of buying new parts costing $1,751 each. Savings last year exceeded $137,000 on this one part. Mr. Chairman, the DOD cost reduction program has shaved Defense costs by $2.4 billion since fiscal year 1961 due to the efforts and ingenuity of our personnel at thousands of installations. The total of these savings is expected to reach $4 billion annually by fiscal year 1967. Now, I would like to discuss specifically the B. USE OF CONTRACTORS TO PERFORM LOGISTICAL SUPPORT ACTIVITIES To respond to the committee's interest, this discussion will cover three questions: What are our basic policies in the use of contract services for logistical support? What is the trend and future outlook for the use of such services? What steps are we taking to assure that effectiveness and economy are the prime criteria for deciding who should perform logistical support services? There are two distinct areas of logistical support concerned and, hence, these questions must be answered separately for each of them. These areas are (1) contract technical services and (2) commercial and industrial type services concerned with the maintenance of equipment, real property, and family housing. 1. Contract technical services: Contract technicians provide engineering and technical services, and conduct classroom and on-the-job training, in connection with the introduction of new weapons and equipment into the operational inventory. Their function is to bridge the "know-how" gap which exists during the initial introduction of new systems until our in-house capability is developed, and in this sense they are part of the cost of acquiring new weapons and equipment. Use of such services must be carefully planned and constantly monitored to prevent their use longer than essential, both because of the additional costs compared to civil service personnel and because it is desirable to make our own forces self-sufficient at the earliest possible time. DOD policies governing the use of contract technical services are provided in DOD directive 3232.8, dated January 14, 1958, which authorizes the use of such services under centralized review and control in each department. Last year I reported to this committee that we had launched a major effort to effect a reduction in the use of such contractor support, and I am pleased to report that progress has been made as revealed by the following figures: Fiscal year: 1961 1962 1963 Man-months contractor technical services 132, 740 138, 913 114, 756 104, 030 .99, 611 1964-- 1965 (estimated). As a consequence of the above trends, expenditures in fiscal year 1965 will be almost $37 million less for such services than in the peak year of fiscal year 1962. The military departments have each organized specific management improvement programs and are reporting quarterly to my office on results achieved. Examples of actions which have been taken are as follows: Navy was able to reduce the use of 37 engine contractor technical service personnel for an annual savings of $732,000 through better utilization of contract technicians and in-house personnel. The Army has identified 135 contract technicians for termination and replacement at the Army's Air Defense School. Based on 80 positions which have been converted to civilian personnel, savings of $123,840 will be accrued annually. Civil service employees traveling out of Rome Air Materiel Area now handle the Air Force's radar repair work in Iceland formerly done by 22 contractor employees, netting savings of $125,000. The services are further seeking opportunities to procure contract technical services on a competitive basis. The Air Force competed the requirement for the instructors on the SAGE computer and obtained a reduction in the man-month rate of 60 percent-from $1,805 to $747-which in fiscal year 1965 will save the Air Defense Command $1.5 million. We are encouraged with this progress, stimulated in large measure by the emphasis given to it by this committee, and we hope to have further progress to report to you next year. 2. Commercial and industrial-type services: This category embraces all other logistical functions and comprises particularly the repair and maintenance functions which occur at our 7,000 installations worldwide. The following basic policies govern the extent to which this work is performed with DOD forces versus contractor forces: As a principle, all of the issuances by OSD and the services provide that logistical support functions must be performed with our own forces when necessary (1) to assure an in-being capability to perform mission-essential tasks; (2) to train personnel needed for service in oversea areas where commercial sources are unavailable; (3) to meet urgent military requirements without delay; (4) to avoid compromising information which would aid potential or known enemies; (5) to provide products or services not available commercially because of unique military requirements or geographic isolation; and (6) to meet other special circumstances which require military operation of the facility in the public interest. |