Federal Government Purchasing; the Effect of Purchasing Policy on Prices and Products
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Citation preview
Copyright by Dickson Reck 1952
FEDERAL GOVERNMENT PURCHASING The Effect of Purchasing Policyon Prices and Products
by Dickson Reck
Submitted in partial fulfillment of the requirements for the degree of Doctor of Philosophy* in the Faculty of Political Science, Columbia Univeristy
Chapter I Introduction Page A.
The Need for Purchasing Policy...........................
1
B.
Relation of Purchasing to Supply.........................
2
C.
1.
Internal Purchasing Policy...........................
3
2.
Buying Policy......................................
3
Relevant Types of Markets................................
ij.
Chapter II Scope and Organization of Federal Government Purchasing Page A.
The Government's Demands for Goods....................... 1.
Kinds and Varieties of Goods.........................
2.
Procedures and Limitations Involved in Making Demand Effective...................................
B.
8
Earliest Unsuccessful Effort to Centralize...........
2.
The General Supply Committee.......................
10
3.
The Procurement Division of the Treasury.............
11
Statistics of Procurement...............................
16
9
Total and Distribution by Agencies of Obliga tions for Supplies, Materials, and Equipment..........
17
2.
Number of Purchasing Offices..................
23
3.
Size of Orders.....................................
23
The Hoover Commission Report and the Enactment of the Federal Property and Administrative Services Act of 19h9....
E.
6
1.
1.
D.
5
The Development of Centralized Procurement Organiza tion and Techniques.....................................
C.
$
29
Procurement Functions and Organization of the General Services Administration............................ 1.
2.
31
Procurement Authority and Functions of the General Services Administration.............................
31
Organization of the Federal Supply Service...........
3^
Chapter III Legal Determinants of Procedure and Limitations on Sources of Procurement Page A.
Conservative Influence of Law on Procurement Decisions.....
B.
Limitations on Purchasing Procedures Applicable to All Agencies........ 1.
38
39
The Law Defining and Requiring the Use of Sealed Bid Procedure......................................
39
2.
Definition of the Sealed Bid Device..................
h-2
3.
Rulings Elaborating the Definition...................
ij.2
il. Permitted Exceptions to the Sealed Bid Require ment— Purchase by Negotiation........................ C.
iUi
Changes in Procedure Introduced by the Federal Property and Administrative Services Act of 19U9...................
U5
D.
Limitations on Time, for Which Contracts May Run...........
h9
E.
Limitations on the Kind of Commodity Specified............
50
F.
Limitations on Sources of Supply.........................
52
G.
1.
General Limitations................................
2.
Specific Limitations................................
Legal Status of Procurement by Production.................
52
56
Chapter IV The Influence of Internal Policy on Purchasing Procedure and Prices Page A.
Timely Supply Versus Low Unit CostPurchasing..............
5>7
B.
Standardization of Demand...............................
60
1.
Item Identification and Commodity Cataloging..........
60
2.
Concentration of Demand............................
61
3.
Relation of Federal Specifications to the Com modity Catalog.........
61
Programs of Cataloging and Federal Specifications.....
63
Results of Standardization of Demand................
68
Centralized Purchasing..................................
71
1±.
C.
1.
Types of Programs and Their Importance...............
71
2.
The General Supply Fund............................
73
3.
Federal Supply Schedules.................. .........
7h
1|.
Federal Supply Centers;
77
the Stores Program..........
Central Procurement through the Federal Supply Service for Direct Delivery................... D.
The Influence of Internal Purchasing Policy...............
79 80
Chapter V Product Policy in Purchasing Page A.
Significance and Complexities of Product Policy.......
82
B.
Methods of Product Definition...........................
9k
1.
Definition of the Physical Product................ . a.
Objective Commodity Specifications..............
b.
Criticisms and Difficulties of Specifi cations .......................................
95
99
c.
Qualified Products Lists.......................
102
d.
Maker's or Seller's Identification..............
10k
e.
Comparison of Alternative Methods of Definition
2,
95
Definition of Conditions Surrounding thePurchase......
105 107
C.
Formal Procedure for Developing Product Definitions........
107
D.
Methods of Using Specifications in Buying.................
108
Chapter VI The Nature of Government Contracting Page A.
B.
Provisions Included in Invitations to Bid.............
110
1.
Standard Conditions of Contracts.........
110
2.
Special Conditions of Contracts.....................
112
3.
Other Provisions of Invitations to Bid........
nil
Contracting Procedure................................... 1.
Sealed Bids........................................
2.
Significant Considerations in Advertising
3.
HU Hit
for Bids..........
116
Significant Considerations Affecting Awards......... °.
118
il. Negotiation..................
12i|
5.
123
Relative Importance of Sealed Bidsand Negotiation
C.
Re-definition of the Sealed Bid Device...............
D.
Private Buyers’ Contracting Policies Compared with the Government's. 1.
...................................
126
126
Contrasts in the Nature of Government and Private Contracting........
12o
2.
Characteristics of Private Contracting Policies.......
128
3.
Significant Types of Private Purchasers’ Buying Devices........................ a.
Limited Competitive Bidding Based on Objective Specifications...............
b.
132
133
Limited Competitive Bidding Based on Approved Products Lists.........................
133
Chapter VII Buying in Markets Where Sellers Bid Competitively (Homogeneous Products) Page A.
Classification of Markets inWhich the Government Buys................
135
B.
Character of the Markets forHomogeneous Products..........
137
C.
The Evidence on Prices and Bidding.......................
139
D.
1.
Paint........................................... .
139
2.
White Lead in Oil..................................
152
3.
Toilet Tissue.......................
156
lu
Canned and Dried Foods.........
167
5.
Sugar...........................................
173
6. Flour............................................
17k
The Effect of the Sealed BidDevice in Buying..............
175
1.
General Considerations..............................
2.
Comparison with Limited Competitive Bids Based on Specifications..............
175
177
a. When Contracts are Awarded to Single Low Bidders....................................... b.
177
When Continuity of Supply is a Factor in Making Awards by Means of the Limited Com petitive Bids Device.......
182
Chapter VIII Buying in Markets Where Sellers Bid Competitively (Differentiated Products) Page A.
Characteristics of the Markets...........................
186
B.
The Evidence on Prices and Bidding...........
188
1.
2.
C.
Markets for Immaterially DifferentiatedProducts......
188
a.
Resin Emulsion Paint...........................
188
b.
Liquid Type Cleaner............................
193
c. Aspirin.......................................
195
d.
Carbon Paper.................................
199
e.
Stencil Paper..................................
199
f.
Anti-freeze Compound...........................
201
g.
Ready-to-eat Breakfast Cereals..................
203
h.
Staples for Paper Fasteners.....................
201;
Markets for Materially DifferentiatedProducts.........
205
a.
Dry Batteries...................... ...........
205
b.
Carpets and Rugs.............................
210
c.
Automobiles...................................
211;
The Effect of the Government's PurchasingPolicy...........
218
1.
General Considerations..............................
218
20 Comparison with Limited CompetitiveBids Based on Specifications............... 3.
220
Comparison with Limited CompetitiveBids Based on Approved Products Lists........
223
Chapter U.
Buying in Markets Where Sellers Bid Competitively (Government Specification Products) Page A.
Characteristics of the Markets
B.
The Evidence on Prices and Bidding...................
C.
......................
226 227
1.
Electric Fans..............................
227
2.
Venetian Blinds....................................
233
3.
Steel Filing Cabinets......
235
1+.
Wood Furniture
238
5.
Post Office Trucks.................................
....
The Effect of the Government's Purchasing Policy.........
21+5 21+8
Chapter X Buying in Markets Where the Sealed Bids Device is Ineffective Page A.
Characteristics of theMarkets.........................
2J?1
B.
TheEvidence on Prices and Bidding........................
252
1.
Markets Where Sellers' Price Policies Make Sealed Bids Ineffective
2.
..................
a.
Electric Lamps..............
252
b.
Automobile Tires and Tubes......................
257
c.
Cement.........................................
261*
d.
Steel Office Furniture.........................
268
Markets Where Product Differentiation Makes Sealed Bids Ineffective....................
C.
252
273
a.
Business Machines and Scientific Equipment.......
273
b.
Repair Parts..................................
278
c.
Pharmaceutical Preparations.....................
279
d.
Cigarettes and Tobacco.........................
281
TheEffect of the Government'sBuying Policy................
282
1.
Markets Where Sellers* Price Policies Make Sealed Bids Ineffective...................................
2.
282
ac Comparison rrth Limited Competitive Bids..
282
b.
Negotiation
285
c.
Anti-trust Actions.............................
.............................
286
Markets Where Product Differentiation Makes Sealed Bids Ineffective........
289
Chapter XI The Consequences to jjae Government of Its Purchasing Policy Page A.
The Results of CentralizedPurchasing by the Federal Supply Service.................................
B.
1.
TheEffect of Choice of Product......................
292
2.
TheEffect of Purchase Price..............
29k
3.
TheEffect of Administrative Costs...........
302
The Effect of CentralizedPolicy onPurchasing by Individual Agencies..................................
C.
292
Summary..................................................
303 305
Chapter XII Tmplications of Government Purchasing Policy for the Economy as a Whole Page A.
The Present Use and Possible Application of Govern 307
ment Purchasing Policy........ 1.
The Present Use of the Government's Policy..........
2.
Possible Extension of the Use of the Govern ment’s Policy.
3.
..................................
315
Consequences of the Government’s Policy in Markets for Homogeneous Products................................ 1.
The Immediate Effects of the Use of Healed Bids.......
2.
The Effects if Sealed Bids Were Used Generally in the Markets............
C.
311
Framework for Tracing the Consequences of the Government's Policy................................
B.
307
316 316
317
Consequences in Markets Where Specifications Reduce Differentiated Products
to Homogeneity.............
1.
The Immediate Effects of the
2.
The Effects if the Government's Policy Were Generally Used a.
UseofSpecifications
32U
............
325
Markets for Immaterially Differentiated Products......................................
b.
323
325
Markets for Differentiated Products Which are Homogeneous in Application but Materially Differentiated in Total Utility.
D.
....
328
The Effects of Standardization of Demand and Centralization of Purchasing..........................
335
Chapter XIII Recommendations Page A.
Recommendations for Increasing the Effectiveness of Government Purchasing.....................
B.
Recommendation for Making Purchasing Data Available to Other Buyers................................
C.
3hl
3h3
The Possibilities of Widespread Adoption of Features of the Government’s Policy....................
Bibliography.............................................
3hh
3k&
List of Tables
Purchases Under Centralized Programs of Pro curement Division, U.S. Treasury Department, Fiscal Years 19ljl through 19^9* Dollar Volume and Percentage Distribution of Obligations for Supplies, Materials, and Equipment by the Department of Defense and Civilian Agencies of the Federal Govern ment for Selected Periods. Dollar Volume and Percentage Distribution of Obligations for Supplies, Materials, and Equipment by Civilian Agencies of the Feder al Government for Selected Periods. Percentage Distribution by Size (Value) of the Number and Total Dollar Value of Pur chase Orders Issued by Nineteen Federal Government Agency Supply Facilities. Estimated Number and Value of Purchase Orders Issued by Eight Typical Civilian Agencies and the Bureau of Federal Sup ply, July 1, 19ii-7— June 30, 19U8. Distribution by Size (Value) of the Number and Total Value of Purchase Orders Issued by the Bureau of Federal Supply, July 1, 19^7— June 30, 19k&. Distribution of Federal Specifications by Procurement Categories, April 1, 19!?0. Purchases under Federal Supply Service Programs, Fiscal Years 19l|6— 19^0, In clusive. Variations in Volume of Purchases under Federal Supply Schedules (Selected Schedules under which Purchases are Con sistently Large in Volume). Variation in Price, Yfeight, "Wear, and Unites of Wear per Dollar of Tire Chains between Types of the Same Make.
Page
TABLE
11
Variation in Tread Wear of Automobile Tires between Makes and Sizes of the Same Make.
90
12
Variation in Life of Dry Batteries between Makes and Sizes of the Same Make.
92
13
Variations in Price, Total Tread Wear and Miles Tread Wear per Dollar of Automobile Tires in $19— $21; Retail Price Range, Summer 1950.
93
lh
Bidders' Prices and Contracts Awarded for Toilet Tissue on Invitation to Bid for Definite Quantity Contracts for Delivery to Various Federal Supply Centers, May 27, 191$.
120
15
Paint Industry, Distribution by Size of Establishment of the Number of Establishments, Employees and Value Added by Manufacture.
139
16
Distribution of Prices Bid for 11 White Enamel Paint Contracts, April 191+8 through March 191+9 -
lUU
17
Frequency with Which Firms Bid for 11 White Enamel Paint Contracts.
ll;6
18
Bidders* Prices for ^hite Enamel Paint Contracts, Responses to 11 Invitations to Bid Dated from. April 1, 19^8 through May 10, 1990.
ll+7
19
Bidders' Prices for White Lead Contracts, Definite Quantity and Definite Delivery Contracts, March and October 1950.
195
20 .
Bidders' Prices for Toilet TissueContracts, Responses to 23 Invitations to Bid Dated from. March 22, 19U8 through November 30, 1950.
158
21
Distribution of Prices Bid for 23 Toilet Tissue Contracts, March 191+8 through December 1950*
163
Page
TABLE 22
Frequency with Which Firms Bid on 23 Toilet Tissue Contracts.
165
23
Bidders1 Prices for White Resin Base Paint Contracts, Term Contracts for the Period from May 15 through Novem ber lit, 1950.
191
2h
Bidders' Prices for Tinted Resin Base Paint Contract, Term Contract for the Period from. May 15 through November Ik, 1950.
192
25
Government Contract and Retail Prices for Type Cleaner, December 1950.
19h
26
Bidders' Prices for Liquid Type Cleaner, Term Contracts for Indefinite Quantities and Indefinite Deliveries, August 16, 1950 through February 15, 1951.
196
27
Government Contract, Retail, and Wholesale Prices for Aspirin in 100-Tablet Bottles, December 1950.
197
28
Bidders' Prices for Stencil,Paper Con tracts, Covering Two One-Year Periods from 12-l-i|.9 through 11-30-50 and from. 12-1-50 through 11-30-51, Indefinite Quantities and Indefinite Deliveries.
202
29
Bidders' Prices and Evaluation of Utility of Batteries Offered in Response to Invita tion to Bid for Term Contracts for the Period from June 20, 1950 through June 19, 1951.
208
30
Evaluation of Bids for Rug Contracts.
213
31
Comparison of Government Contract Prices and Retail Prices for Passenger Auto mobiles.
216
32
Prices of Federal Specification Electric Fan.
229
33
Bidders' Prices and Evaluation of Utility of Electric Fans Offered in Response to Invitation to Bid for Contract for 19, 192 Fans, April I4, 1950.
230
Page
TABLE'
3k
Steel Filing Cabines Prices, l.c.l. f.o.b. Destination, Fall of 19l|$.
237
35
Bidders1 Prices for Steel Upright Filing Cabinets Contracts, Term Con tracts for Indefinite Quantities and Indefinite Deliveries, 19U7— 1951-
239
36
Number of Firms Responding to Invitations to Bid on Contracts for Household and Quarters Furniture.
2h$
37
Prices of Post Office Trucks and Quantities.Purchased,
2lf7
38
Comparison of for Tires and Other Classes March 1, 19U9
262
39
Bidders’ Prices for Steel Office Desks Contracts, Term Contracts for Indefinite Quantities and Indefinite Deliveries, 191*8— 1950.
272
ho
Federal Supply Service Stores Issue Prices to Agencies Compared with Retail Prices, November 19, 197*8.
296
hi
Federal Supply Service Stores Issue Prices to Agencies Compared with Retail Prices, December 12, 19U9.
298
k2
Estimated Savings in Purchase Prices for Commodities Ordered Under Selected Federal Supply Schedules.
300
Government Contract Prices Tubes with Prices offered to of Trade, Contracts for through August 31, 19^9.
List of Figures Page
Figure
1
Interior Enamel Paint, Government Con tract Prices and Bureau of Labor Statistics Average Wholesale Prices.
11*1
2
White Lead in Oil Government Contract Prices and Bureau of Labor Statistics Average Mill Prices.
153
3
Government Prices for White Lead in Oil and Bureau of Labor Statistics Average Wholesale Prices for Dry White Lead.
i$h
k
Toilet Tissue, Government Contract Prices and Mill Wholesale Prices for Nationally Advertised Brands and Brands Sold to Industrial and Jobber Buyers.
159
5
Indexes of Government Contract Prices for Toilet Tissue and Bureau of Labor Statis tics Average Wholesale Prices for Un bleached Sulphite Pulp (March l?Li8=100)
160
6
Canned Peaches, Government Contract Prices and Bureau of Labor Statistics Average Canners' Prices.
169
7
Dried Prunes, Government Contract Prices and Bureau of Labor Statistics Average Packers' Prices.
170
8
Dried Apples, Government Contract Prices and Bureau of Labor Statistics Average Packers' Prices.
171
9
Sugar, Government Contract Prices and Bureau of Labor Statistics Average Refiners' Prices.
173
10
Stencil Paper, Government Term. Contract Prices.
200
11
Rugs, Government Contract Prices and Bureau of Labor Statistics Average Mill Prices.
211
12
Indexes of Government Contract Prices for Post Office Trucks and Bureau of Labor Statistics Average Wholesale Prices for Trucks (January 19i|8=100).
2h7
Chapter I Introduction The basic fact facing purchasers, including the Government, is that markets provide few reliable guides for rational buying.
The patterns of
material product variations and actual contract prices which would provide concrete help in deciding which product offers the maximum utility-per-dollar are not available either because they have not been measured, because as a matter of policy they are not disclosed, or because they have been so confused by the operation of sellers' price and product policies that they are of limited aid. A.
The Need for Purchasing Policy Buyers must sort out the facts from the mixture of facts and fiction
provided through market sources and supplement such information with any additional facts they require to make rational purchasing judgements.
The
extent to which they maximize their gains in the form of the utility-perdollar spent in purchasing depends on the success with which they are able to devise and apply rational policies to guide their purchasing. If a purchaser must buy in small quantities, his policies can aid him in selecting the product which gives him the most favorable quality-price relationship from among the existing competitive offers in the market, but he can do little to change sellers' policies directly and immediately. Large-quantity buyers, such as the Government, can shape their purchasing policies with the intent of inducing sellers to change their policies. For important products large-quantity purchasers can conduct research
z
to uncover the pertinent product patterns, shape their product policy to take advantage of material differences, ignore immaterial ones, and encour1/ age competition in material product differences. This may extend to the 1/ The distinction between material and immaterial product characteristics is discussed in Chapter V. point of influencing suppliers to adjust or redesign their products to meet the particular needs of the buyer. The price policies of such buyers can be based on the knowledge that, for large-quantity purchasers, markets are not fixed structures of prices and sellers1 policies.
Properly devised, purchasing actions can, on occasion,
open up wholesale instead of retail, or primary instead of intermediate mar kets, and may induce individual sellers to deviate from their established price policy when quoting on large-quantity contracts.
The policies can at
tempt to encourage independent competitive pricing on individual contracts rather than pricing under policies resulting in stable or uniform prices. B.
Relation of Purchasing to Supply From the viewpoint of the Government, as from that of any large organi
zation, purchasing is just one link in a tightly interrelated series of activities by which its needs for goods are supplied. Supply includes all functions of providing goods to satisfy the Govern ment’s needs from the time the demands are first made known until the goods which satisfy them, are totally consumed or otherwise disposed of.
More
specifically supply includes the survey and consolidation of requirements, the development and use of specification and standardization programs, buying, inspection, traffic management, storage and issue, property repair and utili-
3
zation, and property disposal.
These are all integral parts of the overall
problem of satisfying the needs of the Government for goods and services at the lowest cost to the taxpayers. Only those of the functions listed above which compose the purchasing policy of the Government are of direct interest for the study of markets. This excludes the functions of property repair, utilization, and disposal which affect the replacement rate of goods, but only indirectly affect pur chasing through their influence on commodity specifications.
Traffic manage
ment is an important determinant of cost, but for present purposes can be ignored for the most part because it does not directly affect the award or the purchase price.
Inspection serves to determine satisfactory completion
of contracts, but can be excluded from direct consideration, except where its cost prevents the use of commodity specifications and the buying devices connected with them. 1.
Internal Purchasing Policy The internal purchasing policy of the Government consists of plans of
action covering the organization of requirements for goods, the choice of the kind and grade of goods to be purchased, and the methods by which the goods purchased are delivered to fill the requirements.
These include the
supply functions of survey and consolidation of requirements, the develop ment and use of standardization programs and commodity specifications, and the storage and issue of goods.
The application of these programs determines
in large part how favorably the Government can buy. 2.
Buying Policy The Government's buying policy consists of a product policy and a price
policy.
The product policy provides methods for comparing the utility of
competitive offers.
The price policy provides methods intended to encourage
competitive pricing by suppliers and for awarding contracts.
These policies
include the supply functions of commodity specification (which also serves internally to help standardize demand) and buying.
Traffic management and
inspection are also covered by the buying policy. C.
Relevant Types of Markets In order to evaluate the effectiveness of the Government’s purchasing
policies, they are compared, in later chapters, with the corresponding policies of private purchasers who buy in large quantities.
It is, there
fore, desirable to confine attention in this study to those goods which are sold in markets where the Federal Government competes with private buyers. This excludes purchases of strictly military items as they involve special designs, secrecy, and urgency of supply which strip such procurement of direct relevance for normal markets.
For similar reasons purchases of
strategic materials for stockpiling are not given consideration.
Purchases
for price support purposes are also excluded because they offer little information that is relevant for competitive purchasing. Before detailing the content of the Government’s and private buyers1 purchasing policies and examining their operation in various types of mar kets, it is necessary to describe the organization through which the Govern ment purchases and the legal limitations within which the Government's policies must be framed.
Chapter II Scope and Organization of Federal Government Purchasing
The Governments Demands for Goods To carry out successfully the many responsibilities set for it by the Constitution and Federal Law, the Government requires goods of almost every conceivable description, some of them in huge quantities.
The task
of providing these commodities and services in a manner that permits the orderly flow of necessary Government activity is unquestionably the most complex supply problem in the country, if not the world.
1,
Kinds and Varieties of Goods It has been estimated that the Government procures 3 million different
items, if each kind, grade, and size of each good is counted.
Each item
is significant because it must be procured as a separate article distinct from every other.
About half of these are specialized items required by
the military services, but an estimated 1 million are used in common by the civilian and military agencies and another half million by the civilian
1/ agencies alone. 1/ For a discussion of the meaning of these figures and for sources see Chapter IV, p. 6 k • These goods range in size from pins to huge electric generators, are demanded in quantities from one to tens of thousands, and vary in unit price from a fraction of a cent to millions of dollars.
Classified by end use
they cover the gamut of consumer, intermediate, producer, and capital goods,
6
and run the range from the most perishable to the most durable of com modities*
The requirements for these goods spring from the individual
1/ needs of more than 2 million civilian employees,
the materiel requirements
1/ Civilian employment on August 31, 1950 was 2,O6O,UO0 ac cording to the Civil Service Commission*
No accurate figures
are available for the armed forces.
of the armed forces, and hundreds of production enterprises, repair shops, dams, warehouses, prisons, hospitals, schools, port facilities, office buildings, and construction projects.
Geographically these requirements
originate at thousands of points scattered all over the United States and in the cities of most foreign countries, wherever Government personnel and projects are located.
The heaviest portion of this demand comes from Washing
ton and the large cities where various Government agencies are thicklyclustered, but streams flow from every state and county in the country and their sources reach back to trickles from the most remote village post of fice in the countryside and forest ranger in the Rockies. All these demands are derived from the needs of employees in perform ing their work and the requirements developed in constructing and maintaining efficient facilities, institutions, and production enterprises.
Hi transla
ting these requirements into demands for specific commodities, therefore, the principal consideration is the contribution the commodities make to the productivity of employees and facilities, rather than the satisfaction of personal preferences of the individuals who consume the goods*
Procedures and Limitations Involved din Making Demand Effective The basic law controlling purchasing by the Federal Government provides simply that, with certain exceptions for the Army and Navy, no purchase shall
7
be made on behalf of the United States unless it is authorized by law or
1/ is under an appropriation adequate to its fulfillment.
1/ 3732 Revised Stat.j
Thus demand is
1*1 U.S.C. 11.
made effective basically by the appropriation acts of Congress.
The Congress
decides on the amount of appropriations according to its opinion whether or not procurement of the goods requested will serve the public interest. Appropriation requests are prepared in standard form by each agency working with the Bureau of the Budget which must review, approve, and con solidate the requests of the Executive agencies before they are presented to Congress.
Appropriations are made by object classifications covering
broad categories of goods the most important of which, from the viewpoint of purchasing, are "Supplies and materials", "Equipment", and "Other con tractual services".
Funds may be legally transferred from one object clas
sification to another according to need, but from a practical viewpoint budget estimates are reasonably accurate and expenditures are substantially limited to the amounts appropriated in each classification.
In addition,
purchases of passenger automobiles, airplanes for use of civilian agencies, rental of buildings in the District of Columbia, and the purchase of land 2/ must be specifically authorized in appropriation acts or other laws.
2/ 60 Stat. 810j 19 Stat. 370; Stat.j
1*0 U.S.C. 3l*j 3736 Revised
la U.S.C. 11*.
Finally, the law imposes the general requirement that funds must be commited during the fiscal year for which they are appropriated.
All un
expended appropriations revert to the Treasury at the expiration of each
8
1/ fiscal year. 1/ See Chapter III, p. ^9.for further discussion of time limitations on expenditures. The full effect, then, of the law is to channel demand into pre determined categories of goods, to place a top limit on the total effective demand in each category, and to make this demand potentially effective for the duration of the fiscal year beginning from the time the appropriation is approved. In addition, of course, the Congress may itself initiate a new program or eliminate an existing one and thus cause important changes in the effec tive demand for goods. The result is a steady flow of demand for goods to satisfy the ordinary needs of continuing Government activity.
Periodically, however, great
changes occur both in the volume and the kind of goods procured following swells in appropriations to meet the needs which arise from depressions, wars, national defense, and foreign aid. B.
The Development of Centralized Procurement Organization and Techniques The nature of the demand and the budgetary and legal procedures by
which it is made effective have tended to result in decentralized and un planned procurement.
The appropriations are made to each department or
major agency of the Government. curement is a minor problem.
From the viewpoint of such agencies, pro
As a result, with the exception of a few agen
cies, such as the Army, Navy, and the Tennessee Valley Authority, for which procurement has been a major task, purchasing has historically been treated as a semi-clerical procedure and has been widely and haphazardly decentral-
9
ized.
With one early exception, noted below, procurement has been organized
according to the individual ideas of successive administrators of each agen cy.
Only in the past few decades has the problem received close and concerted
attention from the Executive and Legislative Branches of the Government.
1.
Earliest Unsuccessful Effort to Centralize In 1792 the Congress provided for a centralized purchasing system under
1/ the Treasury.
The requirements of the Government at that time were small
■ 1/ 1 Stat. 280.
and were largely those of the military forces which were gradually able to encroach upon the authority given the Treasury.
The final blow to any chance
for effective centralization came with the establishment of the Quartermaster 2/ General's office in 1812. For a hundred years after this initial effort to
2/ C.E. Mack, Federal Procurement, Government Printing Office, Washington, D.C., 19h3, P* 12.
centralize purchasing the responsibility for procurement remained in the individual agencies where the organization and methods of supply grew with out coordination.
Aside from the requirements that contracts be awarded
after advertising for bids and public opening of the bids, which were first imposed in the eighteen-sixties, there was no effective direction of pur37 chasing policies from outside each agency. 3/ See Chapter III, p .bZ for further information concerning bidding procedure. At the turn of the century two investigations sponsored by Congress gave publicity to the unsatisfactory results being obtained from the de-
1/ centralized and casually organized procurement systems then in effect.
1/ These were the Dockery Commission in 1893, and the Keep Commission in 1905.
For discussion of their work see C.E. Mack,
op. cit., Chapter III. The principal criticisms of these commissions were the wide variety of prices paid by different agencies for the same item, in some instances to the same dealer at the same time, the failure to use effective specifications and to consolidate purchases to obtain the bargaining advantages of large order quantities.
As a direct result of these investigations, the General
Supply Committee under the Secretary of Treasury was created in 1910 by 2/ act of Congress.
2/ 2.
la
U.S.C. 7;
36 Stat. 531.
The General Supply Committee The General Supply Committee’s main task was to let contracts for the
consolidated supply requirements of the Government.
To accomplish this it
was empowered to prepare annual schedules of consolidated requirements, to standardize the demand of various agencies on common-use items, and to prepare specifications for the purchase of such items.
In the first two decades of
the Committee’s existence its major accomplishments were the establishment 3/ of the Federal Specifications Board and the development of time contracts
3/ The Federal Specifications Board was created on October 10, 1921 by Budget Circular No U2.
See the Fourth Annual Report
of the Budget, 1925, p. 95with suppliers for common-use items under which the individual agencies could
11
purchase their requirements in small quantities according to their needs— '
1/ Contracts of this type are still widely used and are now known as the Federal Supply Schedules.
See Chapter 17, p. 7k*
The advantages of large quantity purchasing could be realized only partially by these time contracts because the quantities bought under them were determined finally by the sum of the small orders of many agencies and were indefinite at the time contracts were let.
Definite quantity contracts
held the promise of fuller realization of the advantages of quantity pur chases.
These, however, required capital to finance the purchases and
storage facilities to hold the goods until they were requisitioned by the using agencies.
The Congress responded to the need for clearing the way
for bulk buying by enacting a law which authorized the General Supply Com mittee to make such purchases, authorized the construction of a warehouse in the District of Columbia and provided a General Supply Fund of $300,000 2/ to be used for bulk purchases. 2/ hi U.S.C. 7a— 7dj
k$ Stat. 132*2.
Although formally the work of the General Supply Committee marked the beginnings of centralized purchasing, the powers of the Committee were not comprehensive and the authority for action rested in the members and the Secretary of the Treasury all of whom were only secondarily interested in the problems of supply.
The Committee did not serve as an effective
device for improving the supply system of the Federal Government. 3*
The Procurement Division of the Treasury In 1933 the first action which held real promise for effective ration
12
alization of purchasing was taken in the establishment of the Procurement Division of the Treasury by executive order of the President under authority 1/ of the Reorganization Act of the same year. The Procurement Division was 1/ The law was the Reorganization Act of March 3, 1933, I4.7 Stat. 1517.
This law authorized the President to re
organize the Executive agencies by executive orders which were to be submitted to Congress and to become effective after 60 days in absence of Congressional action to the contrary.
Executive Order 6166 establishing the Procure
ment Division was issued by the President on June 10, 1933 and was unopposed by the Congress.
In effect, there
fore, it had the force of law, a fact not fully appreciated by the other Executive agencies and later serving to weaken the Division's position. provided with very broad authority.
It was authorized, after obtaining
approval of the President, to centralize the actual procurement for all agencies in its own organization or in any other agency it designated, and also to determine the policies to be followed by other agencies which con tinued to procure their own goods. In spite of this broad mandate the Procurement Division was beset by difficulties in its effort to bring a greater measure of order into the Government's procurement system.
At the outset its activities were largely
absorbed by purchasing for the work relief programs which were initiated in the thirties and did not terminate until well into the war years.
From
19i+l until after the close of the war, Lend-Lease purchases dominated its programs and these were followed by substantial programs for UNRRA and the
13
procurement of strategic materials for stock piling.
The "normal” func
tions of the Division have never accounted for the predominant part of its activities.
This is illustrated by the data shorn in Table 1.
Nevertheless, beginning just before the war and particularly in the years following the close of the war, the Division, renamed the Bureau of
1/
Federal Supply in 19k7, was able to make progress in solving the supply l/ On January 1, 19k7 the name of the Procurement Division was changed to the Bureau of Federal Supply.
This change
gave it a higher status in the Treasury and a title that more accurately described its functions.
The change was
accompanied by an internal reorganization and strengthened program, but its basic legal authority continued unchanged.
problems of the Government„ The program initiated by the General Supply Committee of letting centralized contracts under which procuring agencies order locally was con tinued.
Approximately 90 million dollars' worth of orders have been placed
each year since 19k5 under these contracts.
The work of developing Federal
Specifications was strengthened and speeded and before the v/ar an impres sive start was made in developing a uniform Federal Commodity Catalog. The Bureau made its most impressive progress in its stores and bulk purchases programs.
A large measure of consolidation of warehousing and
stores facilities of the Government throughout the country was made and
12 stores offering what amounted to a mail order service to all agencies were established in the major cities where agencies are concentrated.
Bulk
purchases to fill combined requirements both through stores and by direct delivery to the using agencies were increased.
TABLE 1 Purchases under Centralized Programs of Procurement Division, U.S. Treasury Department Fiscal Tears 19ljl through 19h9 1/ 19hl
Program
■y
Regular Activities Emergency Relief (WPA, NTA, etc) Defense Housing (Furniture and equipment)
Strategic and Criti cal Materials
hf
' W T
"l9Ut 1 19lt5 1 191*6 Millions of dollars
56.8
90.2
—
—
—
—
—
• m *
-
3lt.lt
219.3
171.7
ia.i
.1
5.1*
15.1*
15.9
3/
29.1+
6.5
it.8
7.0
1126.it
I2t70.1
1086.6
1289.lt
258.2
17.1
2.6
it.3
7.6
.8
106.3
215.2
I8.it
-
—
V
y
Special Programs Total
308.9
1358.8
1573.8
1132.lt
| 19it9
1*6.2
39.3
Foreign War Relief (Am. Red Cross) it/
1 l£i*o
30.0
21.7
21.0
1 19lt7
32.9
15. h
Lend-Lease
UNRRA
I' " W " f
1U36.2
1/ Source: Annual reports of the Secretary of the Treasury. the Bureau of Federal Supply.
50lt.2
r-
68.9
252.9
It20.6
233.3
21.5 331.2
7.1
3lt8.lt
517.9
For 19U7 and after the figures are for
(Continued on next page)
TABLE 1
(Continued)
2/ Includes direct purchases of supplies for other agencies and purchases of warehouse stock. 3/ Less than 1 million.
k/ Beginning with 19h7 foreign aid and similar programs are combined as ’’Special Programs".
16
In addition to these accomplishments, the Bureau took a stronger lead in surveying Government supply practice and regularizing supply .poli cies in the various Government agencies.
This was accomplished in addition
to the substantial contribution the Bureau made to the operations of the Government by handling the supply operations for the special programs men-
1/ tioned above, such as stock piling of strategic materials.
1/ For discussions of these accomplishments of the Bureau of Federal Supply summarized here, see the testimony of C.E. Mack in the Hearings, Treasury Department Appropriation Bill for 1950, subcommittee of the Committee on Appropriations-, H.R. 8lst Cong. 1st Sess., pp. 335— 31*8 and p. 389;
testimony of Harry M. Kurth,
Assistant Director, Bureau of Federal Supply in Hearings on Federal Property Act of 191*8, Committee on Expenditures in the Executive Departments, S., 80th Cong. 2nd Sess.;
testimony of
C.E. Mack in the Hearings on S. 990 and S. 859, Committee on Expenditures in the Executive Departments, S., 8lst Cong. 1st Sess.; and the Detailed Report on the Federal Supply Project to the Commission on Organization of the Executive Branch of the Government (hereafter referred to as the Hoover Commission), Sept. 28, 191*8, mimeographed.
For a detailed discussion of the
problem of centralization of procurement see Dana Mills Barbour, Interdepartmental Centralization in Federal Procurement, typescript, Yfashington, D.C., 19l*8.
C.
Statistics of Procurement Despite the accomplishments traced above, the procurement operations
of the Government still leave a great deal to be desired from the view
point of efficiency.
Available statistics reveal that purchasing organiza
tion is widely decentralized and that a large proportion of procurement is conducted on a costly basis because demand is not consolidated and buying operations are not effectively planned. 1.
Total and Distribution by Agencies of Obligations for Supplies, Materials, and Equipment Adequate figures for Federal Government procurement are not compiled.
Those shown in Tables 2 and 3 give the best available indication of the magnitude of purchases by major agencies and the total for the Government. They present figures for the total obligations for supplies, materials and equipment.
On the one hand these figures are not inclusive of all procure
ment, because they do not include land and structures, fixed equipment, utilities services, and purchases which are included in totals of other classifications but which cannot be segregated.
On the other hand the fig
ures include an unknown amount of duplication resulting from the method of reporting the obligations.
Still they provide the best rough idea of the
magnitude of Federal Government procurement. The obligations for supplies, materials, and equipment for all agencies of the Government totalled 8,610 million dollars in 19h9»
The civilian
agencies were responsible for l,3hB million dollars of this or 15.6 percent of the total.
The balance of 7,26% million dollars or
total was procured by the Department of Defense (Table 2).
percent of the The volume of
obligations was rather widely distributed among the civilian agencies as is shown in Table 3. Table 3 does not present a picture of the degree to which procurement is centralized.
The Federal Supply Service of the General Services Admini-
TABLE 2 Dollar Volume and Percentage Distribution of Obligations for Supplies, Materials and Equipment by the Department of Defense and Civilian Agencies of the Federal Government for Selected Periods 1/
Agency
Dec. 1937 through Nov. 1938 Per Value (mil cent lions oi dollars)
Fiscal Year I9k7
Fiscal Year I9kb
Fiscal Year 19k9
Value (mil lions of dollars)
Per cent
Value (mil lions of dollars)
Per cent
Value (mil lions of dollars)
Per cent
Fiscal Year 1950 (estimated) Value Per(milcent lions of dollars)
Department of Defense
k85
53.1
5,508
88.6
6,675
83.1
7,265
8k. k
7,210
82.k
Civilian Agencies
k28
k6.9
712
ll.k
1,359
16.9
l,3k5
15.6
1,535
17*6
Total
913
100.0
6,220
100.0
8,03k
100.0
8,610
100.0
8,7k5
100.0
1/ Source:
Dec. 1937 through Nov. 1938 figures are from the Temporary National Economic Committee, Report of the Procurement Division Group, Treasury Department Subcommittee, Study of Government Purchasing Activities, Part I, Ch.H. In addition to supplies, materials and equipment certain services, such as utilities, are included. The figures for 19k7 through 1950 are the totals of the amounts in object classifications "08.Supplies and materials" and "09.Equipment", given in Summary of Obligations by Objects, compiled yearly by the U.S. Bureau of the Budget. These figures include obligations for goods procured by one Government agency for another on a reim bursable basis. Such obligations are included twice and cause an unknown, but substantial, duplication. For Fiscal Year 19JU8 only, the reimbursable items were accounted for and amounted to 1,300 million of the total of 8,03k million dollars. 1,227 million of the 1,300 million is for the Department of Defense and 73 million for the Civilian Agencies. Obligations for pro curement of fixed equipment, land and structures, rents and utilities services and an unknown amount of commodities under the heading "other contractual services" are not included.
TABLE 3
Dollar Volume and Percentage Distribution of Obligations for Supplies, Materials and . Equipment by Civilian Agencies of the Federal Government for Selected Periods
Agency
Dec. 1937 through Nov. 1938 Per Value (mil cent lions of dollars)
Fiscal Year 192*7 Value (mil lions of dollars)
Per cent
Eiscal Year
192*8 Value (mil lions of dollars)
Per cent
Fiscal Year 192*9 Value (mil lions of dollars)
Per cent
fiscal Year 1950 (estimated) Value Per (mil cent lions of dollars)
Department of Agriculture
2*6
10.7
32
1*.5
29
2.1
33
2.5
27
1.8
Department of Commerce
9
2.1
39
5*5
27
2.0
35
2.6
52
3.2*
Department of the Interior
56
13.1
51*
7.6
68
5.0
69
5.1
87
5.7
Post Office Department
18
1*.2
27
3.8
36
2.7
62
1*.6
51
3.3
Treasury Department 'If
26
6.1
22^
31.6
287
21.1
2*8
3.6
55
3.6
Federal Works Agency 3/
196
Ii5.3
9
1.3
13
1.0
—
—
2*75
35.3
780
50.8
95
7.1
76
2*.9
General Services Administration
—
—
•—
- -
Atomic Energy Commission
—
—
30
2*.2
119
(Continued on next page)
8.8
—
TABLE 3
Agency
Fiscal Year Dec. 1937-. through 1917 Nov. 1938 Per Value PerValue (mil (milcent cent lions of lions of dollars) dollars)
(Continued)
Piscal Year 19U8
Piscal Year 191*9
Value Per (mil cent lions of dollars)
Per Value (mil cent lions of dollars)
Fiscal Year 1950 (estimated) Value Per (mil cent lions of dollars)
Federal Securi ty Agency
3
.7
18
2.5
21
1.5
20
1.5
18
1.2
Maritime Commission
3
.7
13
1.8
19
1 .1*
181*
13-6
81*
5.1*
Veterans Administration
21
1*.9
135
19.0
121*
9.1
111
8.3
112
7.3
All others
50
11.7
130
18.2
616
U5.3
213
15.8
193
12.6
1*28
100.0
712
100.0
1,359
100.0
1,31*5
100.0
1,535
100.0
Total
y
l/ Source: Dec* 1937 through Nov. 1938 figures are from the Temporary National Economic Committee, Report of the Procurement Division Group, Treasury Department Subcommittee, Study of Government Purchasing Activities, Part I, Ch.H. In addition to supplies, materials and equipment certain services, such as utilities, are included. The figures for 19l*7 through 19E>0 are the totals of the amounts in object classifications "08.Supplies and materials” and ”09•Equipment", given in Summary of Obligations by Objects, compiled yearly by the U.S. Bureau of the Budget. These figures include obligations for goods procured by one Government agency for another on a reim bursable basis. Such obligations are included twice and cause an unknown amount of duplication. For Fiscal Year 191*8 only, the reimbursable items were accounted for and amounted to 73 million of the total of 1,359 million dollars. Obligations for procurement of fixed equipment, land and structures, rents and utilities services and an unknown amount of commodities under the heading "other contractual services" are not included. (Continued on next page)
TABLE
3
(Continued)
2/ The Treasury Department totals show a substantial drop after 19U8 as a consequence of the trans” fer of the Bureau of Federal Supply from the Treasury to the General Services Administration when the latter was formed on July 1, 191+9. 3/ The figures in the first column are for the Works Progress Administration which became a part of the Federal Works Agency when the latter was formed in 1939* At the beginning of Fiscal Tear 19 h 9 the Federal Works Agency was made a part of the newly formed General Services Administration.
k/ liicludes 509 million dollars of ’'Funds appropriated to the President”•
22
stration, as the central purchasing agency of the Government, enters into contracts which are made for and paid by other agencies.
Such contracts
are included in the figures for the agencies ultimately responsible for the
1/ contracts and not in the totals for the Federal Supply Service.
The figures
1/ The Federal Supply Service pays for such purchases with money from the General Supply Fund which is later reimbursed by the agency for which the purchase was made.
Inasmuch as the Federal
Supply Service does not make such payments from regularly ap propriated funds, these purchases are not reported by it as obligations to the Bureau of the Budget as would be the case for "reimbursable obligations". in Table 3 for the General Services Administration for 191*9 and 1950, and for the Treasury Department for previous years include mainly purchases for special programs, such as stock piling of strategic and critical materials. Other estimates reveal that the Federal Supply Service is responsible for the procurement of about 20 percent of the total requirements of civilian 2/ agencies. The remaining 80 percent was procured by the using agencies
2/ Testimony of C.E. Mack in the Hearings, Treasury Department Appropriation Bill for 1950, Subcommittee of the Committee on Appropriations, H.R. 8lst Cong. 1st Sess. cent referred to the Fiscal Year 191*8.
The figure of 20 per
Mr. Mack estimated that
this would increase to 25 percent in Fiscal Year 1950 because of new programs of consolidated purchases.
through their offices in Washington and throughout the country.
n 2.
Number of Purchasing Offices The number of purchasing offices operated by the Government is an
indication of the existing scattered organization for buying.
A directory
of such offices in the District of Columbia alone lists more than one hundred, 1/ most of which are headquarters for branches scattered throughout the country. 1/ Directory of Federal Officials Purchasing under Federal Supply Schedules of the Federal Supply Service (Washington, D.C. Headquarters) published by the Federal Supply Service of the General Services Administration, December 19U9. In the report of the Federal Supply Project of the Hoover Commission it was pointed out that, while no exact estimates are available, the known offices plus the many branches and sub-branches, bring wthe total points at which 2/ purchasing operations are carried on for the Government into the thousands".
2/ Detailed Report on the Federal Supply System, op. cit. p. 77. 3.
Size of Orders Typically, the dollar value of individual orders placed through these
many and scattered offices is very small.
A study of 600,000 purchase
orders totalling more than 100 million dollars issued by 19 agencies in the Fiscal Year 19U8 shows that hi percent or 280,000 orders were under $10 and accounted for only 1 percent of the total value.
Eighty seven percent
or 520,000 orders were under $100 and accounted for only 10 percent of the total value of the lot.
Only 13 percent were over $100 in value and these
accounted for 90 percent of the total value. in Table k.
These data are summarized
TABLE 1* Percentage Distribution by Size (Value) of the Number and Total Dollar Value of Purchase Orders Issued by Nineteen Federal Government Agency Supply Facilities 1/
Size of order (dollars)
Humber of orders (percent)
Total dollar value of orders (percent)
.01— 10.00
1*7
1
10.01— 100.00
1*0
9
Over 100.00
13
90
100
100
Total
1/ Source: Bureau of Federal Supply and the Bureau of the Budget ” surveys of nineteen agency supply facilities, February 191*7 through June 191*8. 600,000 orders totalling over $100,000,000 were surveyed. Shown in the Detailed Report on the Federal Supply System, submitted by the Federal Supply Project to the Hoover Commission, Sept. 28, 191*8, mimeographed, p.77.
25
Another study is available which supplements the analysis of the size of orders presented above.
It shows the total and average value of almost
800,000 orders classifed by the 7 agencies which issued them during the year ending June 30, 19i|8 (Table 5).
The average value of all of these was higher
than the average for the 19 agencies:
$256 compared with $171.
If the Bureau
of Federal Supply is excluded, however, the 750,000 orders placed by the remaining 6 agencies averaged $192.
It is apparent from the data that the
averages do little to describe the practices of individual agencies.
The
average value of orders by agencies varied from $25 for the Office of Educa tion to $1,250 for the Tennessee Valley Authority and $2,995 for the Washing ton office of the Bureau of Federal Supply.
The Department of Agriculture
issued more than li50,000 orders with an average value of about $70.
The tremendous number of small orders in all agencies and the low average size of orders in the majority of agencies are the results of un planned decentralized supply operations.
Centralization of procurement and
related supply techniques are intended to provide the degree of planning of purchasing policies and operations necessary to increase order quantities to a more economical size.
This has been achieved to a degree by the Bureau
of Federal Supply. The average size of orders placed by the Bureau is much higher than average for other agencies.
Not only, as was pointed out above,
is its average of $2,995 for the orders placed by the Washington office the highest for any agency, but the average for all its offices, including those in the field, is $1,362 which is also higher than the average for any other agency (Table 5). A study of the distribution by value of these orders, numbering almost
000, issued by the Bureau of Federal Supply is also revealing (Table 6). This study covers a period roughly comparable to the one for 600,000 orders
TABLE 5 Estimated Number and Value of Purchase Orders Issued by Eight Typical Civilian Agencies and the Bureau of Federal Supply July 1, 19ltf--June 30, 191*8 1/
Number of orders
Agency
.‘To'tir value (thousands of dollars)
Average value (dollars)
Post Office Department 2/
1*5,521*
35,U91
780
Department of Agriculture 2/
1*52,351*
31,625
70
Department of the Interior 2/
197,21*7
31*,120
173
Tennessee Valley Authority 2/
33,291*
1*1,581
1,21*9
7,521*
990
132
ll*,l*U0
1*00
28
Federal Security Agency (Office of Education) 3/
900
23
25
Federal Trade Commission 3/
500
27
51*
751,71*3
11*1*,257
192
Field Offices
29,1*89
16,963
575
Washington
H*,197
1*2,522
2,995
1*3,687 795,1*29
59,1*85 203,71*2
1,362 256
Federal Security Agency (Social Sec. Adm.) 3/ Department of Justice 3/
Total Eight Agencies Bureau of Federal Supply k/
Total Bur. of Fed. Sup. Total Nine Agencies
(See next page for footnotes)
TABLE f?
(Continued)
l/ Source: Compiled from data given in Detailed Report on the Federal ” Supply System, submitted by the Federal Supply frojectof the Hoover Commission, Sept. 28, 19I4.8, mimeographed, pp. bZ and 77 • 2/ Estimates, based on Fiscal Year 19i;8 furnished by the agencies to the Federal Supply Project of the Hoover Commission. 3/ Surveys made by the Bureau of Federal Supply in cooperation with the “ Bureau of the Budget during Fiscal Year 19^8.
b/ Study made by the Bureau of Federal Supply.
TABLE 6
Distribution by Size (Value) of the Number and Total Value of Purchase Orders Issued by the Bureau of Federal Supply July 1, 19l7— June 30, 1 1 /
Value of order (dollars)
11 Field Offices Number Per Amount (thou of cent sands of orders dollars)
Per Number of cent orders
Washington Per Amount cent (thou sands of dollars)
Per Number of cent orders
Total Per Amount (thou cent sands of dollars)
Per cent
Under 10
1,657
6
10
2/
691
5
1
1/
2,351
5
11
2/
10.01-100.00
9,198
31
556
3
1,593
11
88
2/
10,791
25
611
1
100.01-300.00
9,U76
32
2,133
13
3,817
27
875
2
13,293
30
3,008
5
Over 300
9,158
31
11,265
81
8,093
57
la,555
98
17,251
lo
55,820
91
29,189
100
16,963
100
11,197
100
12,522
100
13,686
100
59,185
100
Grand Total
1/ Source: Compiled from data given in tne Detailed Report on the Federal Supply System, submitted by “ the Federal Supply Project to the Hoover Commission, Sept* 28, '1918, mimeographed, p. 12. 2/ Less than .5 percent.
29
issued by 19 agencies (Table 10.
Only $ percent of the Bureau’s orders
were under $10 compared with U7 percent for the 19 agencies*
Thirty percent
were under $100 compared with 87 percent for the 19 agencies.
Seventy per
cent were for amounts over $100 in value compared with only 13 percent which exceeded $100 in the case of all agencies.
This increased size of orders
is, of course, to be expected, but it does highlight the results which can be achieved from centralization of purchasing. The statistics of procurement and the size of orders discussed above reflect the fact that, while substantial progress in regularizing purchasing has been made in the past two decades, the organization of procurement in the Federal Government is still inadequate.
The number of small orders not
only represents a source of substantial administrative expense in procure ment, but also suggests a failure to consolidate requirements and thereby to gain the advantages of low prices from quantity purchasing.
D.
The Hoover Commission Report and the Enactment of the Federal Property and Administrative Services Act of 19h9 The Hoover Commission in its report to Congress in 19k9 charged that
Federal Government procurement was largely unplanned and wasteful.
The
members of the Federal Supply Project in their report to the Commission
1/ stated that, in their opinion, the causes for this were
(1) the lack of
1/ For an adequate summary of these criticisms see the press release issued by the Commission on November 23, 19U8 which is copied in the testimony of C.E. Mack on the Treasury Department Appropriation Bill for 1990, op. cit., p. 336.
wide-spread recognition of supply as an important executive function and
30
the resultant failure to evolve a comprehensive Government-wide system that gives adequate emphasis to the many phases of supply, (2) the maze of laws, rulings, and regulations aimed at preventing fraud rather than promoting economy and the consequent encouragement of routine buying rather than of initiative and economy in purchasing operations, (3) the lack of professional competence of Government buyers as a result of low salary scale, and (h) inadequacy of cataloging, specifications development, and inspection, as well as other specific elements of supply operations. This unsatisfactory situation in Government procurement was in part the result of weaknesses in the legal authority provided the Bureau of Federal Supply and of its position as a Bureau in the Treasury Department. By 19h9 an overhauling of the supply organization in the Government had been brewing for some time in Congress.
This was prompted specifically by
the need for rationalizing the methods of handling the disposal of surplus war property, but included the purchasing functions of the Executive agen cies as well.
These moves were supported by the Bureau of Federal Supply
whose officials had felt since the inception of its forerunner organization, the Procurement Division, that there had been a continued misunderstanding of its powers and duties because of a failure to recognize that the executive 1/ order establishing the agency had in fact the force of law.
1/ Testimony of C.E. Mack on the Treasury Department Appropria tion Bill for 1950, op. cit., p. 336.
2/ The issuance of the Hoover Commission Report
and its consideration
2/ Office of General Services, a report to Congress by the Hoover Commission, February 19h9-
31
by Congress tipped the scales in favor of legislation and the result was the enactment of the Federal Property and Administrative Services Act of 19h9
1/
which established the General Services Administration in the Executive
l/ 63 Stat. 1*00. Branch of the Government.
The Bureau of Federal Supply was transferred to
the new agency on July 1, 19k9, the effective date of the law. E.
Procurement Functions and Organization of the General Services Admini stration
In establishing the General Services Administration Congress stated that it intended thereby to provide an economical and efficient system for the supply of personal property and nonpersonal services, for the utiliza tion of available property, for the disposal of surplus property and for records management.
The law establishing the new agency reorganizes the
supply operations and organization of the civilian branch of the Federal Government.
In so doing it modifies the past procedures and organization
of procurement. next chapter.
The effect of the law on procedures is analyzed in the Its effect on the authority and organization for procurement
by civilian agencies is analyzed below.
1.
Procurement Authority and Functions of the General Services Administration A principal purpose of the law is to provide for the Government an
efficient system for "the procurement and supply of personal property and nonpersonal services, including related functions such as contracting, inspection, storage, issue, specifications, property identification and classification, transportation and traffic management, management of public utility services, repairing and converting, establishment of inventory levels,
32
establishment of forms and procedures, and representation before Federal 1/ and State regulatory bodies”. 1/ Ibid., Sec. 2, Declaration of Policy. The Administrator of the General Services Administration is given broad powers with regard to procurement.
In respect of the Executive agen
cies the law instructs him to the extent he decides it is advantageous to the Government and with regard for the program activities of the agencies affected, to: H(l)
prescribe policies and methods of procurement and supply of
personal property and nonpersonal services, including related functions such as contracting, inspection, storage, issue, property identification and classification, transportation and traffic manage ment, management of public utility services, and repairing and con verting; and (2)
operate, and, after consultation with the executive agencies
affected, consolidate, take over, or arrange for the operation by any executive agency of warehouses, supply centers, repair shops, fuel yards, and other similar facilities; and (3)
procure and supply personal property and nonpersonal services
for the use of executive agencies in the proper discharge of their responsibilities, and perform functions related to procurement and supply such as those mentioned above in subparagraph (l);
Provided,
that contracts for public utility services may be made for periods not exceeding ten years; and (ll) with respect to transportation and other public utility services for the use of executive agencies, represent such agencies
33
in negotiations with carriers and other public utilities and in proceedings involving carriers or other public utilities before
1/ Federal and State regulatory bodies 1/ Ibid., Sec. 201 (a). This authority extends over all Executive agencies which in this law includes the Executive departments, independent establishments and any wholly owned Government corporations.
The law specifically provides that
the Secretary of Defense may exempt the Department of Defense from any action unless the President overrides his decision to do so.
It extends
the responsibility of the Administrator to provide those services on request to mixed ownership corporations, establishments of the Legislative and Judicial Branches of the Government including the Senate and the House of Representatives and the Municipal Government of the District of Columbia. In addition to the general functions and authority described above, the Administrator is given direction and control of the General Supply Fund 2/ used for financing bulk purchasesj he may make surveys of and obtain 2/ Ibid., Sec. 109. reports from Executive agencies on property and property management practicesi he is directed to establish and maintain a Federal supply catalog system (provided that he and the Secretary of Defense coordinate their work on cataloging so as to avoid unnecessary duplication) and to prescribe standard ized forms, procedures, and standard purchase specifications.
It is also
specifically provided that the use of the uniform. Federal catalog system and standard purchase specifications by all Executive agencies shall be
3k
1/ mandatory unless the Administrator provides otherwise,
l/ Ibid., Sec. 206.
The Administrator is specifically authorized to issue regulations necessary for carrying out his responsibilities and performing his functions under the Act and the heads of the Executive agencies are required to issue the orders necessary to make such regulations effective.
2/
2/ Ibid., Sec. 20£ (c). The Administrator may not delegate his authority to issue regulations on matters of policy, but otherwise he may delegate and authorize redele gation of his authority to any official of his own organization or to the
3/ head of any Federal agency. 3/ Ibid., Sec. 20^ (d). Taken together these functions and powers are the most comprehensive that have ever been accorded an administrator of procurement functions in the Government and follow closely the recommendations of the Hoover Commis sion.
With respect to the organization of procurement, the Administrator
of the General Services Administration is limited by little except his own imagination and the appropriations he is able to obtain to do the work.
2.
Organization of the Federal Supply Service The Administrator of the General Services Administration has established
and carried out the policy of decentralizing his organization into 13 regions
V Policy is determined centrally,
and centralizing it within each region.
ij/ The organization of the Federal Supply Service described
35
below is established by Administrative Order No 53 dated September 25, 1950 and Administrative Order No 26, Revision No 2 dated August lU, 1950, both of the General Services Administration, Washington, D.C.
but all programs are operated by the regional offices. Within the central office of the General Services Administration there is a Federal Supply Service, directed by a Commissioner, which is responsible for the program planning, policy development and coordination of programs administered by all of the regional offices.
The two divisions of the
Service most directly concerned with purchasing are the Purchase and Stores Division and the Standards Division.
The Purchase and Stores Division is
responsible for the internal purchasing policy and the buying policy and their application by the regional offices to purchasing programs.
The
Standards Division is responsible for the development of Federal Specifi cations, Federal catalog systems and inspection methods and procedures used both in the programs of organizing demand and of buying. Inasmuch as Federal Specifications are developed by using the techni cal personnel of many Government agencies, some additional description is necessary of the organization through which this is accomplished.
The
responsibility for promulgating Federal Specifications and requiring their use in Government buying rests with the Administrator of the General Serv ices Administration.
Historically, Federal Specifications have been de
veloped by technical committees, now 77 in number, composed of members designated by Federal agencies which have specialized technical personnel in the commodities handled by each committee.
The Federal Specifications
Board which is composed of representatives of each of the major departments
36
of the Government supervises the work of the technical committees and advises the Administrator of the General Services Administration on policies and procedures for developing specifications.
The Chairman of the Federal Speci
fications Board has, since its inception, been the Director of the National Bureau of Standards.
The Executive Vice Chairman of the Board is the Di
rector of the Standards Division of the Federal Supply Service, and the speci fications staff of the Service assist in drafting specifications and coordinate the work of the committees. In each of the 13 regions there is a regional General Service Admini stration with an organization parallel to that of the central office in Washington.
In each of the regions there is a Purchase and Stores Division
which conducts all of the actual purchasing and operates the Federal Supply Center in the area.
The nationally centralized purchasing programs are
conducted by the regional offices geographically best located for the pur pose.
Inasmuch as the development of Federal Specifications affects all
the regional General Services Administrations, as well as other agencies of the Government, and is, therefore, the responsibility of the Standards Division of the central office, the regional offices are not concerned with the development of specifications.
The regional counterpart of the Stand
ards Division is the Inspection Division which conducts all programs of inspection and advises regional buyers concerning the use of specifications.
Chapter III
Legal Determinants of Procedure and Limitations on Sources of Procurement The law limiting administrative discretion in the expenditure of appropriated funds and the statutory authority establishing the centralized purchasing organization and prescribing the limits within which it may operate have been reviewed.
The laws governing contracts complete the main
outlines of the legal framework within which the Government must conduct its procurement.
These laws prescribe the form of permissible contracting
procedure, the term of contracts, the type of commodity definition used, and certain limitations to be placed on the sources of supply from which the Government may procure. The basic laws governing advertising for bids and the public opening and recording of bids have been in effect with little fundamental change 1/ since the eighteen-sixties. They are brief and general in wording and for
l/ 3709 Revised Stat. (1861) and 3710 Revised Stat. (1868).
this reason interpretations by the Courts, the Attorneys General, and the Comptrollers General have assumed an importance in many respects greater than the statutes themselves.
The most recent law affecting procurement is
the Federal Property and Administrative Services Act of 19U9 which es tablished the General Services Administration.
These laws and decisions,
together with others affecting contracts, have formed a rigid system of barriers restricting the latitude allowed administrators and buyers in their maneuvers to obtain the most favorable price.
38
A,
Conservative Influence of Law on Procurement Decisions It is useful at the outset to understand the forceful and conservative
influence the law and its interpretations exert on purchasing officials. A bonded officer of the procuring agency must approve each invoice and certify that the procurement giving rise to it has been made in accordance with law.
The payment is then made by the agency and the paid invoice is
later audited by the General Accounting Office.
If the General Accounting
Office decides that, according to its interpretation, which is defined by the Comptrollers* General opinions, the law has been violated, it takes ex ception to the payment and calls upon the certifying officer to pay to the Government the losses thereby sustained.
If the officer is unable to demon
strate to the General Accounting Office that the transaction was consistent with the law, he is personally liable.
He may be successful in persuading
the supplier to make the payment, otherwise he must make it himself.
If he
is -unable to make it, the bonding company is responsible and it in turn will collect what it can from the officer.
In any case the action could well ruin
him. financially. If, however, the head of the agency is of the opinion that the certifying officer was not guilty of serious misconduct, he may go to the Congress and ask that the officer be relieved of responsibility for that particular trans action.
An act of Congress is required to afford such relief.
As all in
voices are audited and the penalty may be financial ruin, discharge, or at least a heavy embarrassment and a great deal of worry and trouble, the certi fying officer is extremely cautious and very conservative in observing the letter of the law and its interpretations.
In doubtful cases he will be
naturally inclined to decide the issue in the favor of safety, even if this results in a less favorable price to the Government.
It is possible, however,
39
in important cases to obtain a decision from the Comptroller General in advance of a particular decision. B.
Limitations on Purchasing Procedures Applicable to All Agencies The most important legal limitations on purchasing pertain to pro
cedure although there are also limitations that apply to the provisions included in contracts, sources of supply, and related matters.
1.
The Law Defining and Requiring the Use of Sealed Bid Procedure The law substantially limits purchasing to the buying device known by
Government buyers as "advertising” or "purchasing under 3709".
The refer
ence is to the statute requiring the use of the method, which reads in part, "Unless otherwise provided in the appropriation concerned or other law, purchases and contracts for supplies or services for the Government may be made or entered into only after advertising a sufficient time previously 1/ for proposals,..." Exceptions are provided for, but these -will be discussed
1/ 3709 Revised Stat.; 60 Stat. 809;
later.
U
U.S.C. 5.
This buying device is better known outside the Government as purchase
by "sealed bids".
Inasmuch as this term is more descriptive of the essential
nature of the process, which sets it off from alternative methods used in the same markets than "advertising" or "purchasing under 3709", it will be used hereafter. A companion section of the law provides for public opening and record of bids.
It states that "whenever proposals for supplies have been solicited,
the parties responding to such solicitation shall be duly notified of the time and place of opening the bids, and be permitted to be present either
in person or by attorney, and a record of such bids shall then and there 1/ be made". l/ 3710 Revised Stat.; lfL U.S.C. 8. This is the basic law defining the purchasing devices permitted for use by the civilian agencies of the Government,
It was modified in some
important respects for the General Services Administration only by the Federal Property and Administrative Services Act of 19h9> but inasmuch as the provisions of this Act have not yet been fully reflected in purchasing procedures, it will not be considered at this point.
After the present
discussion the changes made possible by the Act will be analyzed. The theory behind the law envisions the triple benefits of giving all persons an equal chance to obtain Government business, preventing favor itism or fraud in the letting of contracts, and securing for the Government 2/ the benefits arising from competition. This theory underlies the decisions 2/ U.S. v. Brookridge Farm, CCA Colo., Ill Fed. 2nd U6l (191+0), affirming 27 Fed. Supp. 909;
13 Comp. Gen. 28k.
interpreting the basic law. Any citizen has a right to bid, unless he is lawfully debarred,
3/ but
3/ Lukens Steel Co. v. Perkins, 60 S.Ct. 513 (1939). bids may not be withdrawn once they have been opened and the bidder is bound to accept the award."' This is true even when there are mistakes in bidding, V
29 Comp. Gen. 3kl.
1/ unless the error is so gross as to make the contract "unconscionable".
ill
Nothing in the law specifically requires the award to be made to the
lowest responsible bidder, but decisions of the Courts and the Comptrollers 1/ General over a long time have firmly established this as a requirement. 1/ Scott v. U.S., Uk Ct. Cl. $2k (1909)5 D.C. Mass., 6 Fed. Supp. 761 (193U);
O'Brien v. Carney,
13 Comp. Gen. 28U;
22 Comp. Gen. 1018. Objections have been raised to awards made to other than low bidders where the price increase was negligible and the improvement in quality above that 2/ specified was substantial. 2/ 5 Comp. Gen. 330;
16 Comp. Gen. 991.
A second fundamental requirement has been added to the procedure by the rulings of the Comptrollers General.
Specifications, unidentified with
any source of supply, must be used in all cases where the product or service 3/ can be so defined. This is based on the theory that the use of specifica3/ 5 Comp. Gen. 330;
6 Comp. Gen. l£8;
7 Comp. Gen. 298.
tions, objectively drawn and unidentified with any supplier's product, allows the widest number of prospective suppliers to bid as compared with alternative methods, such as calling for bids by manufacturers' names, brand names, or by lists of acceptable products.
The specifications, therefore,
as well as other elements of invitations to bid, must be such as to permit
V The Comptroller General has,
competitors to compete on a common basis.
k/ U.S. v. Brookridge Farm, CCA Colo., Ill Fed. 2nd I4. 6I (19U0), affirming 27 Fed. Supp. 909.
however, allowed a brand or manufacturer’s name to be specified, provided the words "or equal" were added, in cases where for technical reasons it 1/ was not feasible to write objective specifications. The technical diffil/ $ Comp. Gen. 835>; 13 Comp. Gen. 357* culty must be real;
for example, the Comptroller General has disallowed the
use of this method for commonplace items such as mops, paper clips and wheel2/ barrows. 2/ 10 Comp. Gen. 5552.
Definition of the Sealed Bid
Device
The law mentioned above anddecisions interpreting it have established the basic characteristics of thesealed bid purchasing device. the following elements which arerequired by law:
It comprises
(l) advertising for bids
sufficiently in advance of the opening to allow bidders to respond, (2) ac ceptance and consideration of the bid of any responsible bidder who has not been
debarred from bidding, (3) public opening and reading of bids at a
date announced sufficiently in advance to permit bidders to be present, (10 public recording of bids at the time of opening, ($) definition of the com modity or service by objective specifications unless this is technically not feasible in which case the commodity may be identified with a brand or manufacturer’s name, provided the words "or equal" are added and (6) award of the contract to the lowest responsible bidder* 3. Rulings Elaborating the Definition Various rulings have further defined elements of the sealed bid procedure, particularly those regarding award to the lowest responsible
i00,
(2) when the public exigencies require the immediate delivery of
bS
the article or the performance of the service,
(3)
when only one source of supply is available and the Govern ment purchasing or contracting officer shall so certify, or
(10
when the services are required to be performed by the con tractor in person and are (a) of a technical and professional nature or (b) under Government supervision and paid for on 1/ a time basis..."
1/ jUl U.S.C. 5, as amended 60 Stat. 809 (191+6) and 63 Stat. 2*00 (191*9). The exception which is most important for the present discussion is that for purchases under $500.
As has been seen, the number of small value
purchases is large, therefore, this provision exempts a great many orders from the sealed bid requirement. The term "public exigency" has been interpreted rather narrowly by the Courts to apply to those occasions where the condition to be met is 2/ unforeseen, sudden, or particularly perplexing. The Comptroller General 2/ Good Roads Machinery Co. of New England v. U.S., D.C. Mass. 19 Fed. Supp. 652 (1937). has also taken this view and in one case ruled that the failure to anticipate cold weather in the northern United States could not justify an exemption on
If
the grounds that the situation created a public exigency. 3/ lU Comp. Gen. 361;; C.
IS Comp. Gen. 1095-
Changes in Procedure Introduced by the Federal Property and Admini strative Services Act of 19k9 The Federal Property and Administrative Services Act of 19U9 not only
tt>
established the General Services Administration, but also modified the law defining purchasing procedure for the new agency. The Act specifically exempts the General Services Administration from the provisions of Section 370? of the Revised Statutes, but substitutes other provisions which to a large extent continue the requirement that the 1/ bulk (in value) of purchasing be conducted under the sealed bid procedure. 1/ 63 Stat. I4OO, Sec. 310 exempts the General Services Admini stration from 3709 Revised Stat. and associated laws, while Sec. 302 (c) in effect continues the requirement of using the sealed bid procedure by the statement ’’All purchases and con tracts for supplies and services shall be made by advertising, as provided in section 303, except..." All elements of the sealed bid procedure are left unchanged with one exception:
the way is open to the purchasing official to use more dis
cretion in making awards than is possible under the current definition of the phrase "lowest responsible bidder".
The law provides that "Award
shall be made with reasonable promptness by written notice to that responsi ble bidder whose bid, conforming to the invitation for bids, will be most advantageous to the Government, price and other factors considered:
Pro
vided, that all bids may be rejected when the agency head determines that 2/ it is in the public interest so to do". The words "most advantageous to 2/ Ibid., Sec. 303 (b). the Government, price and other factors considered" may well be interpreted to allow purchasing officials much more latitude in awarding contracts than they were permitted previously.
As yet the law has not been in operation
k7
for sufficient time to determine its precise effect in this regard. In the law there are lh classes of purchases which are excepted from the sealed bid requirement and for which 11contracts may be negotiated by 1/ the agency head’1. Nine of these cover situations which are not of direct 1/ Ibid., Sec. 302 (c). interest to the normal run of purchasing, such as procurement in foreign countries, in times of emergency, when secrecy is important from the view point of national security, and when contracting for technical and profes sional services.
The remaining $ classes which allow negotiation of con
tracts for commodities in ordinary domestic markets are discussed below* Medicines and medical supplies are exempted from the sealed bid pro cedure.
The importance of purity in such supplies and the strong preference
of doctors for particular brands often make it desirable to award contracts without competition to all those firms whose manufacturing and quality con trol methods are known to be reliable. Three classes of exceptions cover procurement in markets where monopoly elements make sealed bids inappropriate or ineffective.
One of these covers
cases where procurement from specified sources is required to assure stand ardization and interchangeability of parts.
Another is for "supplies or
services for which it is impracticable to secure competition" and is intended to cover goods such as business machines:
it is less expensive to the Govern
ment to pay a monopoly price than to incur expenses and difficulties, such as retraining of personnel in the use of machines supplied by the low bidder. The third class of exceptions is intended to give the Administrator added latitude for operation in cases where he feels there is collusion among sel lers to quote unreasonable prices to the Government.
It provides an ex-
m ception "for supplies or services as to which the agency head determines that bid prices after advertising therefor are not reasonable (either as to all or as to some part of the requirements) or have not been independent ly arrived at in open competition:
Provided, that no negotiated purchase
or contract may be entered into under this paragraph after the rejection of all or some of the bids received unless (A) notification of the intention to negotiate and reasonable opportunity to negotiate shall have been given by the agency head to each responsible bidder and (B) the negotiated price
y
is the lowest negotiated price offered by any responsible supplier:..." 1/ Ibid., Sec. 302 (c) (13).
The final class of exceptions of particular interest here is for small value purchases.
It allows the General Services Administration to negotiate
purchases when the aggregate amount does not exceed $1,000.
This provision
frees the hands of the Federal Supply Service buyers on a very large number of contracts. The Administrator is given the power to delegate his authority to negotiate contracts in these excepted cases and thus, as experience is gained from operation of the new Act, any benefits which are found to accrue from such procurement methods may be extended to other Executive agencies. The law specifically states that the contracts negotiated under the per mitted exceptions to the sealed bid procedure may, except for specified re strictions, be of any type which the agency head believes will best serve the interests of the Government.
The principal restriction is a prohibition
of cost-plus-a-percentage-of-cost contracts.
Cost-plus-a-fixed-fee con
tracts are permitted but ceilings are placed on the amount of the fee for various types of services and the procuring agency is given the power to
inspect plans and audit books and records of the contractors. 1/ Ibid., Sec. 30l+. Fees may not exceed 10 percent of the estimated cost of the contract, exclusive of the fee, except for research or experimental work for which the ceiling is 15 percent, and for architectural and engineering services relating to any public works or utility projects for which the ceiling is 6 percent. D.
Limitations on Time for Which Contracts May Run Unless otherwise provided by law, contracts for supplies may not be
made for a longer term than one year from the time the contract is signed. There is also a general restriction applying to all Federal expenditures which exercises a strong influence in limiting the time for which contracts are let.
Unless authorization is provided specifically by law, no Govern
ment agency may spend in any year more than the money appropriated to it for that year, nor may it involve the Government in any future obligation for more than the moneys appropriated for the year in which the commitment 2/ is made. The test of legality of expenditure with respect to this law is 2/ 31 U.S.C. 669. whether or not the funds are committed during the fiscal year.
Thus it
does not prevent the letting of contracts for terms that extend beyond the
1/
end of the fiscal year.
3/ 3690 Revised Stat.; 11 U.S.C. 682. Indefinite quantity contracts for which funds are not committed until individual purchase orders under them are placed, may be signed before the
50
funds, which will eventually pay for the individual purchases, are appropri ated.
Contracts may also be let in advance of the fiscal year in which
funds are available for payment if a proviso is inserted making them operative
1/ only if the funds are later appropriated. l/ New York Cent, and H. RR v. U.S., 21 Ct. Cl. U68.
These limitations have no effect on the decisions of purchasing officials in the great majority of contracts which would, in any event, be for short terms or call for immediate delivery.
In some instances where contracts
would otherwise cover terms longer than one year the legal restriction to one year obstructs sound economic judgement.
The prohibition against com
mitting the Government for funds which will be available in future appropria tions limits Government purchasing in some cases to the use of indefinite quantity term contracts where definite quantity contracts might otherwise be used. E.
Limitations on the Kind of Commodity Specified Although the Comptroller General considers the use of specifications
to be required by law, he has on numerous occasions objected to the content of particular specifications on the grounds that they restricted competi2/ tion. On the same grounds he has complained in his yearly reports about
2/ 5 Comp. Gen. 712; 2Q1+;
7 Comp. Gen. 23 and 2723 13 Comp. Gen.
lij. Comp. Gen. 671;
16 Comp. Gen. 171.
the use of detailed physical property or mechanical construction requirements as opposed to definition of the quality required in terms of performance and
3/ service which would be less restrictive of design details. 3/ Annual Report of Comp. Gen. of the U.S. 1927, p. 17 j
This attitude
51
Ibid., 1928, p. vii. has also been reflected in his decisions, as in the case of tractors where specifications of minimum weight and pulling power were forbidden and a case where the description of marine engines for the Coast Guard was re stricted to a simple statement of over-all dimensions, conditions of operation, and requirements of performance.
1/ 16 Comp. Gen.
1/
He has also objected to what he con-
£ Comp. Gen. 963.
sidered were requirements in excess of reasonable Government needs and has intervened in cases where shatterproof glass was specified for Department of 2/ Commerce station wagons intended for use on air field runways, and in a
2/ 9 Comp. Gen. £19. case where a special requirement was made that an automobile weigh not less 2/
than 2,700 pounds.
3/ 6 Comp. Gen. 838. The Hoover Commission strongly expressed the opinion that in such cases the Comptroller General insists on making administrative decisions although the Attorney General and the Courts say this power rests with ex-
V
ecutive officers.
lj./ Task Force Report on The Federal Supply System (Appendix B), prepared for the Hoover Commission, Government Printing Office, Washington, D.C., January 19^9, p. 9.
S2
F.
T.-inritations on Sources of Supply
1.
General Limitations Generally applicable limitations which affect sources of supply for
Government purchases are probably more important as nuisances than as ef-
1/ fective limitations.
The most important one is the Buy American Act.
1/ hi Stat. 15'20 (1933);
la U.S.C. 10a.
This Act provides that, unless the head of an agency determines it to be in consistent with the public interest or the cost to be unreasonable, only raw materials produced in the United States or manufactured articles produced in the United States substantially from materials in turn produced in the United States shall be acquired for public use.
Exceptions are made for
goods acquired for use outside the United States and for goods not produced here in commercial quantities or satisfactory qualities.
The Comptroller
General has required that each standard contract form and each voucher and 2/
invoice contain stipulations of compliance with this law.
2/ Circular letter A-£l607, issued by the General Accounting Office, Aug. 1$, 19la, published in Decisions of the Comptroller General of the United States, Appendix, p. ll£0.
It is also required that provisions be included in contracts stipulating compliance with the labor standards set forth in the Walsh-Healey Act of 3/ 1933.“ 3/ U9 Stat. 2036;
la U.S.C. 35— UO.
The most recent requirement affecting sources of supply is the pro vision of the Federal Property and Administrative Services Act of 19k9
53
which states' “It is the declared policy of the Congress that a fair pro portion of the total purchases and contracts for supplies and services shall
1/ be placed with small-business concerns."
No definition is given of "sitiall-
1/ 63 Stat. U00, Sec. 302 (b). business" nor of "fair proportion", but the discussion in committee that preceded the passage of the Act and subsequent discussions among officials of the General Services Administration and Congressional committees shed some light on the probable interpretation of these terms.
In hearings be
fore the House Subcommittee on Study of Monopoly Power the Administrator of the General Services Administration revealed that the President had instructed him to utilize the same definition for small business as that used by the 2/ military agencies. By this definition a small business is a firm which
2/ Hearings, Serial No lU, Part 2-A, Subcommittee on Study of Monopoly Power of the Committee on the Judiciary, H.R. 8lst Cong. 1st Sess., p. 258. employs fewer than 500 persons, is independent and is not dominant in its 3/ field. The only action that appears to have been taken with regard to
3/ Ibid., p. 165. increasing the number of awards to "small business" was an inquiry by the Subcommittee on Study of Monopoly Power addressed to the Comptroller General asking his opinion on the question of whether the existing practice of making awards by the drawing of lots in the case of equal low bids could be changed to awarding such contracts to the smallest firm.
The Comptroller General
in his reply stated that the General Accounting Office would not question
1/ such awards.
The Comptroller General has ruled that awards may not be made
1/ Reported in the Progress Report— First Session of the Select Committee on Small Business, H.R., 81st Cong., p. 19. to other than the low bidder solely on the basis that the bidder qualified 2/ as a small business concern. The knowledge of the strong Congressional
2/ 28 Comp. Gen. 662. desire to favor small business has also been a factor, although not a con trolling one, in the considerations of the General Services Administration 3/ in its reorganization to decentralize purchases discussed in Chapter II.
3/ Testimony of the Administrator of the General Services Admini stration before the Subcommittee on Study of Monopoly Power, op. cit. p. 237— 272. 2.
Specific Limitations The procurement of certain classes of goods from specified sources of
supply is required by law.
These are prison-made products which include
the articles manufactured by the Federal Prison Industries, Incorporated organized in the Department of Justice; blind-made products manufactured by organizations formed to give employment to blind people under quasigovernmental auspices; Printing Office.
and certain products manufactured by the Government
The schedules of articles available from the first two of
these sources include such items as duck and canvas goods, cotton textiles, articles of clothing, mattresses, metal furniture, shoes, brushes, mats, processed foods, wood specialties, brooms, mops, huck towels, cotton bags, and pillow cases.
The prices are set at competitive levels by Government
55 y officials and, where possible, procurement must be from these sources.
1/ Federal Prison Industries, Inc. was created by Executive Order 6197, Dec. 11, 193k pursuant to i|8 Stat. 1211 (193^) which also included the requirement that Government agencies procure from this source.
The equivalent law covering blind-
made products is $2 Stat. 1196;
111 U.S.C. 1|6— 1;8.
The Government Printing Office is a required source for all agencies for printing and binding, which include forms, letterheads, pamphlets and 2/ manuals. When procurement is for supplies to be used in the District of
2/ Act of Jan. 12, 1895 as amended, and subsequent acts; 28 Stat. 622 (1895) and subsequent laws;
14i U.S.C. Sec.
Ill, 111a and 111b.
Columbia, paper, plain envelopes and selected stationery items must be 3/ procured from the Government Printing Office. 3/ k3 Stat. 592;
lili U.S.C. Sec. 225.
The general legal requirements affecting the sources of supply, such as the Buy American Act and the Walsh-Healey Act, may have some effect in discouraging a few firms from bidding, but certainly this is not decisive in any significant segment of Government procurement.
The requirements of
these laws do clutter up purchasing procedures with additional red tape. The necessity of purchasing certain classes of goods from specified sources of supply removes those purchases from normal markets.
Inasmuch as they
are not large in volume, they have little effect on the total volume of Government purchases and, therefore, further consideration of them is un-
56
necessary for purposes of this study. G.
Legal Status of Procurement by Production The Government, like private business, enjoys the unrestricted legal
1/ right to manufacture its own supplies.
It appears that no specific statu-
l/ Lukens Steel Co. v. Perkins, 310 U.S. 113, 127 (19U0).
tory authority is necessary for the Government to enter production.
Unlike
private business, however, the Government cannot ordinarily use procurement by production as a practicable alternative to procurement by purchase.
2n
contrast to private business a Government agency normally has neither the facilities nor the capital ready at hand for such ventures.
The funds must
be appropriated and thus would come under the scrutiny of the Congress. Funds appropriated for other purposes, such as the purchase of supplies or for operation and maintenance, may not according to the Comptroller General, 2/ be used for the purchase of facilities. The Congress has on a number of
2/ 2 Comp. Gen. 761;
19 Comp. Gen. 333.
occasions approved laws or appropriations for production as in the cases of the Tennessee Valley Authority, arsenals, Navy yards, the Government Printing Office, and the Post Office for its Division of Mail Equipment Shops, but it is very doubtful that, barring a decided change in political atmosphere, it would countenance any move that wouldallow the Government to adopt for itself on any widespread scale this competitive force that is open for use in many cases to private buyers.
Chapter 17 The Influence of Internal Policy on Purchasing Procedure and Prices
A.
Timely Supply Versus Low Unit Cost Purchasing Within the limits imposed by law and by the organization of Government
agencies there remains considerable latitude for the development of spe cific procurement policies and for a wide variation in the effectiveness with which they are applied.
As has been explained, the Federal Supply
Service has the responsibility for formulating purchasing policies and unifying procurement practice of the Government in accordance with them. For this reason, attention in the present chapter, which deals with the internal procurement policy of the Government, centers on this agency. The internal procurement policy involves only some of the functions of supply.
These are the study and definition of requirements for goods,
the standardization of demand on the fewest varieties of goods that will adequately satisfy such requirements, the centralization of purchasing the goods on which demand has been standardized, and the development of storage and issue programs which will facilitate large quantity purchasing.
All
these work toward the goals of increasing purchasing quantities while at the same time making timely provision of goods to the users.
The attempt to
reach both of these goals develops two apparently opposing sets of influences. Timely provision of goods at numerous widely scattered points of con sumption creates a tendency toward high costs.
Local procurement is con
venient but the resulting small order quantities involve high unit admini strative costs and high unit prices.
58
The consolidation of requirements and centralized purchasing in large quantities on the other hand, reduce unit administrative costs and result in considerably lower prices.
Such centralized purchasing, however, has
often caused delays in delivering supplies to the points of use.
The result
ing shortages cause a lowering of working efficiency which, while difficult to calculate precisely in dollars, is admittedly costly.
A balance between
centralization and decentralization of supply operations at the point where the total costs to the taxpayer (including the price of the goods, the admini strative costs of procurement, storage and issue, and the cost of inefficien cies resulting from shortages) are minimized is a desirable goal. To what degree the ideal balance between prompt service and cost has been achieved is not known exactly.
It is generally agreed, however, that
order quantities are unnecessarily small in too large a percentage of cases and that this results in high cost of procurement to the Government on both counts mentioned above, higher prices and high unit administrative costs. It has been estimated that the cost of salaries incurred in the requisi tioning of supplies by using agencies and in purchasing by the Bureau of Federal Supply amounted to more than $23 per transaction on purchases for direct delivery to agencies, and more than $13 per transaction on supplies
1/ purchased for stores and issued to using agencies.
These figures do not
1/ Detailed Report on the Federal Supply System, op. cit. Table 6, p. 81.
include such overhead costs as material used in the operation and the sala ries of supervisory personnel, nor the cost of budgeting, accounting, and disbursing connected with the transactions.
In supporting its charge that
purchasing operations of the Government are unplanned, the Hoover Commission
59
offered as evidence the fact that "approximately half of the several mil lion purchase orders issued annually are for $10 or less", and "Since the cost of processing a purchase transaction is greatly in excess of $10, the
1/ overhead cost is more than the cost of the goods".
To those high costs
1/ Office of General Services, op. cit., p. 27.
must be added the costs due to high purchase prices.
Prices obtained by
the Government for goods purchased after consolidating requirements, are lower than prices obtained in typical small quantity purchases of individual agencies by amounts ranging from 15 percent to k 5 percent depending on the item, and on the average are about 30 percent lower than the small quantity 2/ price.
2/ See Chapter XI, p. 323.
Centralization thus appears to be obviously desirable, but the savings made are illusory unless supply operations are themselves decentralized geographically to the point where prompt service can be provided.
This
need is reflected in the recent moves to decentralize the purchasing and stores operations of the Federal Supply Service which were outlined in Chapter H . Hi attempting to achieve a proper balance between service and costs, a number of techniques have been developed and used. to lower purchase prices and costs are:
Those that operate
standardization of demand, the use
of specialized contracting devices, and the operation of stores.
The major
actions that operate directly toward providing more timely service are de centralization of purchasing operations away from the District of Columbia into regions and the establishment of regional stores.
Properly devised
60
and operated these programs can work to minimize the ultimate costs of supply.
They also determine to a large extent the contracting procedure
appropriate for each purchase transaction.
B.
Standardization of Demand Standardization of its demand for goods has long been a difficult task
for the Government.
The variety of goods it demands reflects the needs and
to some extent the personal preferences of millions of ultimate users.
These
demands must be satisfied through a necessarily complex procurement organiza tion operating at hundreds of locations in markets strongly influenced by product differentiation policies of sellers.
These characteristics of the
demand and market operations create both the need for and the obstacles to effective standardization of demand on the minimum necessary number of com modities. The steps required to standardize demand are: cataloging;
item identification and
elimination of unnecessary variations of items serving the same
or closely related needs;
and the drafting, promulgation and use of stand
ard specifications to define the goods filling those needs.
1.
Item Identification and Commodity Cataloging An item, from the viewpoint of supply, is a commodity or service which
is unique with regard to a particular use, and which requires its own pro curement decision.
Thus each size of bolt, each different color of paint,
each different size of can of the identical food, a chisel bought in a quan tity of one and the same chisel bought in a box of six would in every case require a different item number.
Item identification consists of describing
the commodity in sufficient detail to disclose its uniqueness from the view point of purchase and use.
Item identifications brought together according
61
to a standard classification compose a commodity catalog. The listing of all the items procured by the Government according to their end use serves to reveal and eliminate the duplications of identifi cation.
2.
This alone provides some standardization of demand.
Concentration of Demand The process of commodity cataloging not only automatically brings
about a degree of standardization of demand by eliminating duplicate identi fications for identical items, but also prepares the way for furthersimpli fication by arraying in convenient form the item descriptions ofclose sub stitutes for the same end use or for closely related end uses.
Without
such a cataloging process it is an almost impossible task to weed out the unneeded items from among the million and a half used by the civilian agen cies.
With a catalog it is possible to make studies of related end uses and
the range of commodities currently being procured to satisfy them and to con centrate procurement on the minimum number necessary to satisfy all real needs of efficient operations.
When this is done the catalog becomes a
listing of all necessary items classified by end use with each item described in sufficient detail to identify it as unique.
3.
Relation of Federal Specifications to the Commodity Catalog The concentration of demand on the minimum number of commodities
noted above cannot be accomplished successfully without the development of specifications.
Item descriptions which are sufficiently explicit to
distinguish the item clearly from all others in the catalog seldom provide an adequate definition of the product's utility.
Before close substitute
products for a given use can be eliminated with impunity from the catalog the quality expected of the remaining products must be defined by specifi
62
cations.
For example, assume that cataloging has proceeded to the point
where three kinds of tire chains are listed, standard duty, reinforced link, and heavy duty.
The variation in quality between brands within each kind
of chains may well be greater than the variation in the average quality of the kinds.
The item description in this case distinguishes one kind from
another, but does not define the quality of the chain beyond this.
A test
program of all brands of each of the kinds of chains reveals that among the good quality chains which are standard with well organized manufacturers, the reinforced link chain outwears either of the others and at current prices also gives substantially more utility-per-dollar.
The only way
that demand can be safely concentrated on the reinforced link chain is by supplementing the item description with a reference to a quality specifi cation which will confine procurement to the good quality reinforced link
1/ chain, and then eliminating the other chain items.
1/ Test data on tire chains are given in Chapter V.
The same specification which serves in the manner noted above to com plete the program of standardizing demand is also necessary for buying.
The
item description may at times be sufficiently detailed for purposes of pro curement, but normally it is not.
It is a function of the specification to
provide an objective commodity definition in sufficient detail to insure that quotations are received on comparable items and that the products de livered on contracts are of the quality contemplated when the contract was signed.
This function of specifications is the subject of Chapter Vj
it
is mentioned here only to clarify the relationship between the problem of defining quality levels and that of increasing order quantities by con centrating demand on a limited number of items.
63
Commodity cataloging may, of course, serve a useful purpose by eliminating duplicate items when specifications are not available for all the items.
Similarly, specifications may be developed and used to
standardize demand without a commodity catalog.
A specification covering
a group of items is, often, in the absence of a complete catalog, a simpli fied item list as well as a definition of quality.
If, however, there is
no uniform catalog system and each agency has its own catalog, the procure ment officer may have difficulty in deciding to which numbers in his cata log the specification applies.
He may decide it applies to one item and
not realize that it should also be used for other items which are close substitutes. Ideally the development and use of a commodity catalog and of objective commodity specifications are complementary elements in the process of stand ardization of demand.
Federal Specifications provide the logical extension
of commodity cataloging which maximizes its effectiveness and links it to actual purchasing procedures.
U.
Programs of Cataloging and Federal Specifications In a supply system as large and complex as the Federal Government's
the programs necessary to develop satisfactory commodity catalog and specifi cations systems assume the proportions of major tasks.
Work on Federal
Specifications has been in progress for three decades and for two decades the construction of the Federal Standard Stock Catalog has been authorized by law.
The books of Federal Specifications and the existing commodity
catalogs in use in the Government make an impressive array and represent substantial accomplishments.
They are seriously deficient, however, when
compared with the total program recognized to be necessary for an efficient
61*
procurement and supply system. Bi 1929 Congress authorised the printing of a Federal Standard Stock Catalog and a board was established in that year to plan its development. A catalog was developed and for a time before the outbreak of World War H served an extremely useful purpose although it was never sufficiently com prehensive to serve adequately the needs of the Government.
After the out
break of the war it rapidly became obsolete and by 19h9 there were seventeen
1/ major Government commodity catalogs in use by various agencies.
The total
1/ Statement of W.S. MacLeod, Deputy Director in charge of the Standards Branch, Bureau of Federal Supply, Treasury Department in Hearings, Supplemental Appropriation Bill for 19U8, Subcommittee of the Committee on Appropriations, H.R. 80th Cong. 1st Sess., June 16, IShl, p. 532.
number of items contained in these catalogs was over 12 million, many of which were duplicates.
It was estimated that if duplications were eliminated,
3 million items would remain of which 1 million would represent items in com mon use by the military and civilian agencies and another half million items used by the civilian agencies only. The General Services Administration is responsible by law for develop ing the proposed standard Federal catalog system for all agencies, civilian and military.
Congress has never appropriated sufficient funds for the agen
cy to undertake the project.
The Department of Defense, having funds
available, and appreciating the importance of the task, has carried forward a major project in cataloging with which the Federal Supply Service, with the inadequate staff at its disposal, is attempting to cooperate to insure that the finished product meets the need of civilian as well as defense
65
agencies.
In 1950 the military agencies had between 2,000 and 3,000 em
ployees working directly or indirectly on this cataloging project.
In the
civilian agencies because of budget limitations only 22 employees were
1/ engaged on the project. 1/ Testimony of Jesse Larson, Administrator, General Services Administration in Hearings on Independent Offices Appropriations for 1951a Subcommittee of the Committee on Appropriations, H.R. 8lst Cong. 2nd Sess., Part 5> P« 1699.
As the result of thirty years of work, since the Federal Specifications Board was first established in 1920, there were in effect as of April 1, 1950, 2,071 Federal Specifications.
These are widely distributed among
many purchase classifications (Table 7).
This number of specifications
still falls far short of being adequate to serve the needs of Federal Government procurement. The 2,071 specifications, however, give far more coverage in purchasing than a simple comparison of the 2,071 specifications with the estimated 1,500,000 items demanded for civilian use would lead one to believe.
Each
specification may include many items, that is, it may cover a number of varieties, classes, types, and sizes of the commodity or commodity group for which it is written.
A study made by the Federal Supply Service dis
closed that the minimum number of items covered by a single Federal Specifi cation was five for one kind of white paint in five container sizes, while the maximum number was in excess of fifty thousand for photographic paper. The average number of items covered by each specification was estimated to be 155.
TABLE 7 Distribution of Federal Specifications by Procurement Categories April 1, 1950 1/
Instruments Paints, Pigments, Varnishes Metals Metal Products Rubber and Rubber Goods Paper and Products Minerals and Products (non-metallic) Tools Textile Products Chemicals Electrical Apparatus Insulating Materials Brooms and Brushes Meats and Sea Foods Textiles (yardage) Pipe, Fittings, Plumbing Fixtures Cleaning and Polishing Materials Vegetables Vegetable Products Furniture Fruit Products Hardware Petroleum and Products Wood Products Leather and Leather Goods Animal Products Fruits Glass and Glassware Cereals and Products Drugs and Medicines Knit Goods, Nettings, Webbing All other classes Total all classes
1/ Source:
179
166 123 100 90 88 87 83 77 70 65 65 59 56 55 50
k9 U7 ia 37 37 33 33 33 30 29 28 28 27 23 20 163 2,071
Compiled from Federal Specifications Index, April, 1950.
67
The 1,500,000 items is the estimated number required after elimination of duplicate identifications of identical items, but does not reflect re ductions which would result from elimination of close substitutes,
in view
of this possibility and also of the fact that many of the agencies have de veloped their own specifications for commodities that are used principally by them, it is estimated that specifications sufficient to cover about 1 mil lion items would be adequate.
According to this reasoning something over
6,000 Federal Specifications are required ultimately to serve the needs of
1/ Government buying.
1/ This information on the relation of specifications and items was supplied by the Federal Supply Service from data in its files.
The figures given above indicate that existing Federal Specifications are available in about one-third of the cases where they are needed, but this statement requires qualification.
Preference has been given to the
development of specifications for items which are frequently procured and which account for large dollar amounts of procurement.
On the other hand,
ease of development and the availability of suitable data have been strong factors in programming the work of committees and these bear no necessary relation to the importance of the commodities.
Also, while the use of Fed
eral Specifications is mandatory, complete application to purchasing trans actions is not possible in the absence of a standard Federal commodity cata log for the simple reason that it is not always possible to tell easily whether or not a given specification applies to a particular transaction. In any event it is clear that at present Federal Specifications are far from adequate to cover the need.
68
5. Results of Standardization of Demand The application of cataloging and specification programs to a complex supply pattern typical of the Government's, or any large organization's almost inevitably results in substantial simplification.
A few examples
will serve to convey an idea of the importance of such standardization. One of the most basically important design elements common to all kinds of equipment with moving parts is anti-friction bearings.
At one
time the number of items of anti-friction bearings carried in the records of the Department of Navy totalled 225,000.
As a part of its cataloging
and subsequent standardization program the Navy was able to reduce this num ber of items to 8,500 without eliminating any bearing that was in fact re quired to fill a need.
The previous duplication not only had caused un
necessary repetition of contracts for identical items with a corresponding reduction in purchase quantities, increased the costs and problems of stor ing these vital parts, but had resulted in costly confusion in supplying the needs of the Navy as well.
In one case a ship was diverted five hundred
miles to obtain a replacement bearing only to find, when it reached port, that the identical part was in the ship's inventory under a different item number. One common anti-friction bearing, all manufacturers' makes of which were dimensionally and functionally interchangeable, was carried under 207 different identification numbers in the Government catalog records where
1/ only one number was required.
1/ Testimony of W.S. MacLeod and C.E. Mack in Hearings on the Treasury Department Appropriation Bill for 1950, H.R. 8lst Cong. 1st Sess., p. 358.
69
It is interesting to note that this confusion in the Government system derives directly from the policy of product differentiation which is such a common element in sellers' policies in today's markets. the 207 numbers for one bearing is this.
The explanation of
In spite of the fact that all manu
facturers make their bearings to common specifications to insure interchange ability, each one sells his bearing under his individual catalog number which conveys no information that it is standard in the production of all manufac turers.
Suppliers of assemblies or completed equipment using this bearing
purchase it from one or more manufacturers and in turn each use their indi vidual identification for the bearings as repair parts.
They may include
each bearing under as many numbers as there are manufacturers from whom they buy.
Dealers in spare parts who may bid successfully for Government business
also use their unique numbers.
When this compounding of numbers in private
industry is further multiplied by the Government as a result of procurement from different sources and the different cataloging practices of various procuring agencies, the result is considerable -unnecessary duplication, in this case 207 numbers for one item.
This confusion resulting from efforts
of sellers to profit through product differentiation is characteristic of private industry generally as well as of Government operations. Another major program by the Navy resulted in the following accomplish ments:
3,000 types of electron tubes were reduced to 800 of which procure
ment is focused on 193 types;
37,000 types of meters were reduced to 3,700;
1,1)00 vibrators were reduced to 18; 1,000 molded thermoplastic materials
1/ were reduced to 29;
and 6^9 capacitors were reduced to 93*
The Army alone
1/ Letter from M.E. Andrews, Assistant Secretary of the Navy in Hearings on the Federal Property Act of 191)8, Committee on
Expenditures in the Executive Departments, S., 80th Cong. 2nd Sess., p. 79. had six separate item numbers for an identical one-and-a-half pound claw
1/ hammer of the usual type used around a home.
One Federal Specification
1/ Hearings on the Treasury Department Appropriation Bill for 1990, op. cit. p. 399. was issued providing for 12 types of roasting pans which replace 26 types previously covered in 9 different agency specifications.
2/
2/ Task Force Report on the Federal Supply System (Appendix B), op. cit. p. 88. The examples given above illustrate the simplification in procurement and supply resulting from standardization of demand.
No precise overall
estimates of the possibilities are available although the estimated 79 per cent reduction in items, from twelve to three million, which could be made through the development of a uniform commodity catalog for all Government Departments gives a rough measure of the minimum that might be accomplished. Standardization of demand on the minimum number of items required to satisfy the needs of the Government results in increased purchase quantities but may not of itself be sufficient to increase quantities to the most econo mical size from the viewpoint of procurement.
Other devices are needed to
consolidate requirements to the point where desirable low prices and low administrative costs of bulk purchasing may be realized. various forms of centralized purchasing.
These consist
of
71
C. Centralized Purchasing 1.
Types of Programs and Their Importance As was stated in Chapter II, the Federal Supply Service has the res
ponsibility both for formulating and putting into effect purchasing policies for all agencies of the Government and also for conducting centralized pur chasing operations where it deems these to be desirable,
in exercising
this authority it has put into effect a number of programs which are designed to bring to the Government the advantages of large-quantity procurement. They are:
the Federal Supply Schedules;
the establishment of regional
stores to supply the needs of agencies for commonly used goods;
and the
consolidation of demand for specified articles of equipment and their central purchase by the Service for direct delivery to the requisitioning agency. An idea of the relative importance of these programs can be gained from the figures given in Table 8. The Federal Supply Schedules are the most important quantitatively with the direct delivery and stores programs following in that order.
The three programs in total accounted for 181
million dollars or about 20 percent of the 921* million dollars' worth of purchases by civilian agencies in Fiscal Tear 19k9» if purchases of stra-
1/ tegic materials are not considered.
A further indication of coverage of
l/ Total obligations for supplies, materials and equipment for civilian agencies of 1,31*5 million dollars (Table 3) less pur chases of strategic materials of 1*21 million (Table 1) gives a rough estimate of 921* million for civilian procurement. these programs is given by a survey of 19 agency supply facilities for the period from February 191*7 through June 191*8 made by the Bureau of Federal
TABLE 8 Purchases under Federal Supply Service Programs Fiscal Years 19h6— 1950, Inclusive
Fiscal Year
Stores Issues 3/
Federal Supply Direct Delivery 1/ Schedules 2/ Millions of dollars
Total
19h6
19
11
95
125
192i7
2k
19
dk
127
19U8
2k
36
89
lh9
19k9
21
6k
90
181
1950
26
51
100
177
1/ Source: Subcommittee of the Committee on Appropriations, H.R. 8lst Cong. 2nd Sess., Hearings on Independent Offices Appropria tions for 1951, Part 5, p» 1716. The figures for l950 -were supplied by the Federal Supply Service. 2/ Source: Annual reports of the Secretary of the Treasury for the “ years through 19h9. The figure of 100 million dollars for 1950 is a rough estimate furnished by the Federal Supply Service.
73
Supply and the Bureau of the Budget.
This study showed that these agencies
placed 17 percent of their orders with the Bureau of Federal Supply stores and 8 percent through Federal Supply Schedules contractors.
No figures
were given for direct purchases made by the Bureau for these agencies. While the figures were for number of orders and not total value of orders they indicate about the same extent of use of these centralized purchasing techniques as do the figures in Table 8 quoted above.
The agencies surveyed
were mostly administrative and the majority of their personnel were located in Washington.
The Task Force of the Hoover Commission was of the opinion
1/ that insufficient use was being made of these central purchasing techniques.
1/ Detailed Report on the Federal Supply System, op. cit., Chart XI7 and following comment.
2.
The General Supply Fund The supply centers (stores) and purchase for direct delivery programs
require funds for financing purchases for the period between the time when the Federal Supply Service must make a payment to take advantage of cash discounts and the time after the receipt of the requisitioned goods when the using agency is able to make payment to the Service.
It was to provide
the capital necessary for such financing that the General Supply Fund was
2/ established.
The original authorized capital of $300,000 has subsequently
2/ Chapter H , p. 11.
been periodically increased until in September 1930 it stood at a little 3/ more than I44 million dollars. For long periods of time the size of this 3/ In Fiscal Tear 1950 the appropriated capital in the Fund
7k
was a little over 10 million dollars.
In Fiscal Tear 1951
regular and supplemental appropriations increased this by
3k million dollars* Fund limited the amount of centralized procurement that was practically possible, but at present it is considered to be sufficient to finance the programs in prospect* At this time, therefore, the way appears to be open for an expansion of the programs for centralization of purchasing described in the remainder of this chapter.
Attention is given to the working of the programs and the
types of purchasing devices used to procure for each of them.
The analysis
of the effects of the operation of the devices is left for subsequent chapters. 3.
Federal Supply Schedules The Federal Supply Schedules represent an attempt to combine the
advantages of centralized purchasing with those of decentralized procure ment.
They are indefinite quantity time contracts providing for local
ordering in small quantities by the using agency and local delivery by the supplier directly to the agency. There are about 100 Federal Supply Schedules in use, each of them cover ing either one class of the Federal Standard Stock Catalog or some portion of a class.
Each schedule is the subject of many contracts the total number
of which is about 2,500.
The contracts are let by the sealed bid procedure
and cover periods which are most frequently one year, but which may be for as short a period as 3 months if market conditions warrant it.
An attempt
is made to stagger the expiration dates of the contracts so as to smooth out the work load for the buyers of the Federal Supply Service, but there have been cases of discontinuity of the contracts.
75
The total number of items included in all of the schedules is about
y
14. 0,000.
In I9I48 350,000 orders were placed against the schedules and the
1/ Testimony of C.E* Mack in Hearings on the Treasury Depart ment Appropriation Bill for 19k9, Part 1, Subcommittee of the Committee on Appropriations, H.R* 80th Cong., 2nd Sess., p. 328.
total value of business they represented was about 90 million dollars.
This
represents a substantial decline from the high of 307 million dollars in 19hk» That, however, was a war-induced peak.
The low amount during the thirties
was 38 million dollars for the year 1935*
Variations in the volume of the
consistently heavily used schedules such as those for fuel and office equip ment are shown in Table 9. The schedules are mandatory for orders made for delivery in the District of Columbia.
About 10 percent of the scheduled items are mandatory for
field agencies as well as those in the District.
The remainder are optional
for use by field offices. From the viewpoint of the ordering agency the procedure for the use of the schedules is very simple.
The schedules are much like catalogs giving
item descriptions, sources of supply and the prices at which the items may be procured.
By reference to such schedules the purchasing officer simply
places the agency’s own order with the contract supplier without advertising for bids or negotiating prices, obtains delivery, and makes payment just as he would for any orders he places.
"Where use of the schedules is voluntary
for the agency, the purchasing officer may buy from alternative sources if he is able to obtain better prices in this way.
Normally, however, there is
a price advantage to be obtained from the use of the contract suppliers listed in the schedules.
Some idea of the magnitude of the administrative problem
TABLE 9 Variations in Volume of Purchases under Federal Supply Schedules (Selected Schedules under -which Purchases are Consistently Large in Volume) 1/
From 1936 to 191*6 dollar volume varied from Millions of dollars
19l*6
10— 50
20
Motor Vehicle Parts
1*— 60
6
18
Precision Instruments
1— 7
3
26
Furniture
3— 35
1*
Class
7 Fuel 8
51 Acids, Chemicals, etc. 53
Stationery
51* Office Equipment
0.2— 3 1— 8 7— 77
2 3.5 la
1/ Source: Detailed Report on the Federal Supply System, submitted by the Federal Supply Project to the Hoover Commission, Sept. 28, 19U8, mimeographed, p. 1*1.
77
of maintaining these schedules is given by the fact that about 350*000 copies of schedules are distributed each month by the Federal Supply Service to Government agencies in Washington and in the field* in order to keep the
1/ system up to date. 1/ The information on the Federal Supply Schedules given above ■was in part provided by the Federal Supply Service and in part taken from the Detailed Report on the Federal Supply System* op. cit. pp. 1*0— 1|£.
The Federal Supply Schedules are most appropriate for items not used in sufficient quantity or with sufficient regularity to make it profitable to buy them in definite quantities and carry them in stock until they are required, for perishables, and items such as fuel that cannot be economical ly carried in stock by the Government in many points about the country.
1*. Federal Supply Centers: the Stores Program The Federal Supply Schedules represent one method of profiting in buying through the anticipation of demand.
Another way, more effective
where it is appropriate, is to order the goods in as large quantities as the anticipated demand justifies and store them until they are needed.
For
this purpose the Federal Supply Service operates 11 supply centers in ad dition to the principal warehouse in the District of Columbia.
These centers
are located in Atlanta, Boston, Chicago, Cleveland, Denver, Fort Worth, Kansas City, Los Angeles, New York, San Francisco, and Seattle.
They are
in effect mail order houses because they serve the territories adjacent to the cities in which they are located. The stores are operated under the direction of the Purchase and Stores Division of the Federal Supply Service in Washington which prints and dis
78
tributes a national stock catalog of the items carried by the stores.
The
goods stocked are limited to administrative and housekeeping items commonlyused by various agencies. 3,000.
The total of items stocked by the stores averages
Use of the stores for the procurement of all items stocked is manda
tory upon agencies for items to be delivered in the District of Columbia and,
1/ ■with specified exceptions, for delivery outside the District of Columbia.
1/ Detailed Report on the Federal Supply System, op. cit. p. 119.
The stores program is financed by use of the General Supply Fund.
Turn
over is comparable to private mail order business vrith yearly sales running about four and a half times the average investment in inventory.
Requisi
tioning agencies pay the unit purchase price of the goods plus an amount which is calculated to cover the direct costs of storage and issue.
The
amount necessary to achieve this is estimated to be 10 percent of the pur chase price.
In practice the realized markup varies as it is changed only
periodically while the prices paid for goods vary from contract to contract. Purchases of the items stocked in the supply centers are made by use of the sealed bid device on definite quantity contracts and on term con tracts when they yield favorable prices.
Where savings can be made by con
solidating requirements and purchasing in large quantities, contracts are let centrally for direct delivery to the various supply centers.
The ma
jority of the items, however, are procured centrally by the regional stores
2/ themselves, each for its own requirements.
2/ The information on the stores program was obtained from records of the Federal Supply Service in Washington, D.C.
79
9*
Central Procurement Through the Federal Supply Service for Direct Delivery The Federal Supply Service holds the power by law to perform the pur
chasing for any Federal agency.
Aside from requiring the use of Federal
Supply Schedules and stores, as previously noted, the Service has exercised this power to a very limited degree. It does require that specified articles of equipment be procured only through the centralized purchasing programs of its Washington office.
These
items are automotive vehicles, electric fans, electric water coolers, domes tic mechanical refrigerators, steel office furniture, steel upright filing
1/ cabinets, typewriters, and motor vehicle identification tags.
The require-
l/ Information supplied by the Federal Supply Service, Washing ton, D.C.
ments for these items are periodically consolidated in Y/ashington.
They are
then purchased by the sealed bid procedure on contracts calling for definite quantities and delivery direct to the using agencies.
Interim requirements
may be purchased in small lots as ordered by the using agency after clearance through the Federal Supply Service.
The dollar volume of these programs has
expanded rapidly since 19h6 as important durable goods became available and amounted to £l million dollars in Fiscal Year 1990 (Table 8). It often happens that the agencies themselves elect to use the buying services of the Federal Supply Service on individual orders. sible the Service accomodates such requests.
Wherever pos
Normally the advantage to the
Government results only from the more effective buying of the Service’s staff than can be provided by the less specialized and less expert staffs
80
of the requisitioning agencies. At times, however, requisitions for the same commodities are received at the same time and consolidation of such voluntarily submitted requisitions is possible.
An example is the case
where the Denver supply manager of the Service received two requisitions for masonite from two different agencies.
By combining them and arranging
carload shipment over part of the distance and a forwarding shipment for the remaining distance, he was able to reduce the price from sixteen cents a square foot to six and four-tenths cents, which resulted in a substantial
1/ saving on the total of more than 22,000 square feet.
Such cases are the
1/ Testimony of C.E. Mack in Hearings on the Treasury Depart ment Appropriation Bill for 19k9t op. cit. p. 3^5>-
exception rather than the rule with requisitions which are submitted volun tarily.
D.
The Influence of Internal Purchasing Policy The most obvious result of the Government's internal purchasing policy
has been a degree of centralisation of purchasing in the form of the various programs discussed in this chapter.
It was noted in Chapter II that the
programs of the Federal Supply Service account for about 20 percent of the
2/
purchases of the civilian agencies.
This is not, however, an adequate
2/ Chapter II, p. 22.
measure of the influence of internal policies on centralization.
There is
some unknown, but substantial, centralization of purchasing within agencies which have their own programs of centralized term contracts and stores.
The
development of uniform contracts, purchasing procedures, cataloging, and Federal Specifications by the Federal Supply Service has exerted an effect
81
on the agency programs. Historically, centralization of purchasing both within the Federal Supply Service and within other agencies has meant the concentration of purchasing activities in Washington.
The recent changes in the organization
of the Federal Supply Service reflect a new trend toward geographical de-
1/ centralization of purchasing away from Washington.
It is expected that
1/ The organizational changes are described in Chapter II, p. J>7.
purchase programs will not be changed by this move, but that some of them will be transferred to regions other than Washington which are located in the market centers for the products involved.
In addition it is planned to
encourage further centralization of purchase programs within each region, particularly in connection with the operation of the regional supply centers or stores.
Thus the current trend is toward the decentralization of supply
operations to regions and the consolidation and centralization of operations within the regions. The underlying purpose of internal purchasing policy is to increase utility-per-dollar of the funds spent in procuring supplies.
The influence
of the operation of the policy in accomplishing this can be judged onlyafter the operation of the buying devices in various markets has been analyzed, and a more adequate idea of prices is obtained.
The immediate
influence of internal purchasing policies in this respect is to determine the quantities to be procured under single contracts and whether the pur chase will be made under Federal Supply Schedule term contracts or definitequantity-definite-delivery contracts.
Chapter V Product Policy in Purchasing
A.
Significance and Complexities of Product Policy The "buying of proper quality", according to a survey conducted by
the National Association’of Purchasing Agents, is generally considered by purchasing agents to be their most important function, taking precedence over other factors in purchasing, such as price, service, and the financial 1/ responsibility of vendors. What the purchasing agents really mean is that l/ N.A.P.A. Handbook of Purchasing Policies and Procedures, Vol. 1, New York, 1939, p. 227. the most perplexing difficulties of their job are encountered in developing and applying effective definitions of the physical product rather than in developing and applying effective policies -with regard to price, service, and the financial responsibility of vendors.
Quality is no more important
than price, for the utility-per-dollar, which purchasing agents attempt to maximize, is a ratio of the two and can be increased or lowered by variations in either one.
Furthermore, at every stage in the development of the pro
duct policy, which provides the basis for bidding and award of contracts, the effect of the policy on price must be considered.
The problem of de
fining the product to be purchased is perplexing because utility is difficult to measure and the product policies of sellers serve to confuse rather than clarify the patterns of products and prices from which buyers must chooseo Product policy in buying comprises the methods which guide the choice
83
of the product to be purchased from the first expression of the need through to the final agreement to buy.
In the Government the choice of the product
is made in the process of standardizing demand which was described in the previous chapter.
There the effect of standardization in reducing varieties
of products and increasing purchase quantities was considered.
Here the con
cern is with the effect of standardization on the quality-price ratios of the goods purchased.
When the process of commodity cataloging has reached
the point where all the obvious duplications and irrelevant varieties of products have been eliminated, some number of kinds, grades, and qualities of products which are substitutes for a given use will remain.
These can
be further weeded out only after a careful study of the use requirements and the utility of the products in satisfying them has resulted in the develop ment of a specification for the most suitable product.
The promulgation of
the specification at once completes the cataloging process of concentrating demand on the minimum necessary number of goods and provides the commodity definition for purchasing. A number of items serving closely related end uses may be listed in the catalog.
Most of these have their prescribed uses and individual preferences
are not considered.
Thus items of office furniture used by employees are
assigned to them on the basis of their work and salary grade, and most office supplies, such as typewriter and carbon paper, are designated for specific uses.
In other cases, however, such as those of typewriters and other busi
ness machines, numbers of substitute products are available from which the user may requisition the one he believes to be most efficient.
3h all, cases,
though, the process of cataloging and the promulgation of a Federal Specifi cation substantially complete the process of choosing the product for pur chase.
This process of choosing the optimum quality of product and -writing a specification for it involves (1) an analysis of the use requirements the good must fill, (2) a determination of the utility of the substitute products which are available in markets to satisfy the use requirements, and (3) an estimate of the utility-per-dollar ratios which the purchase of the commodities can be expected to yield considering their customary prices, their differences in cost, and the number of competitors who
will
be in a position to bid on contracts for the product. The analysis of the use requirements— the needs goods must satisfy— is within the immediate control of the Government officials and, while such analyses often require considerable skill and ingenuity, they cause no great difficulties. Yftien attempting to measure and compare the utility of competitive products in satisfying the use requirements, buyers find that markets provide many claims of superiority, but little reliable information. The buyer must use the product and is interested in its utility.
The
seller, because he obtains his profit from the sale and not the use of the product, is interested in the products saleability;
he is con
cerned with its utility only to the extent that it increases saleability. In order to cope with the confusion which arises from the fact that his motivation is different from that of sellers, the buyer must be able to distinguish from among the characteristics of the product which give it saleability, those which give it utility.
The Government is in an
advantageous position to do this because of the nature of its needs and the resources it has to test goods and survey the products and prices
8£
offered in markets.
To the Government, utility is the ability of a good
to satisfy the needs which arise in the performance of services.
Sale
ability may be defined as the ability of a good to make buyers decide to purchase it.
Saleability is built up both by the utility of the pro
duct and by claims of product qualities which do not exist and which, therefore, yield no utility when the product is consumed.
If the utility-
providing characteristics of the product are called material characteris tics, then saleability is a function of both the material and immaterial characteristics of the product. What is material can be determined only by reference to the needs the product must fill.
To the extent that needs are individual to
particular buyers, what is material in a product will be different for each buyer.
What is immaterial to many buyers may be material to many
others. If the Government is persuaded by sales promotion that the immaterial characteristics of a product are material, it will fail to realize in consuming the good the full amount of the utility it expected to receive when the purchase was made.
The Government may or may not be aware
of this fact, but, as it purchases goods to fill needs for which objec tive criteria of measurement are available, it nevertheless will suffer a loss. The material characteristics are in large part, but not entirely, embodied in the physical characteristics of the product and are, also in large part, but not entirely, measurable.
The immaterial characteris-
tics are in large part, but not entirely, abstract from the physical characteristics of the product and are also in large part, but not entirely, unmeasurable. In many of the markets in ■which the Government buys sellers pur sue, apparently with profit, price policies backed by product policies which are built of claims of immaterial as well as material differences in their products.
The success of these policies depends on buyers*
irrationality and lack of knowledge of the utility of products.
Con
versely, the success of buyers' policies, including the Government's, depends on the rationality with which the buyers are able to sort out the material from, the immaterial differences in the products offered them. The material patterns of product qualities are not clearly re vealed by the claims of manufacturers, by the manufacturers' names, by brand names, by the price lines in which they are sold, or by dif ferences in the prices of competitive products.
Those responsible for
writing the specifications must rely in the final analysis on market information, the reliability of which they can check by their own in vestigation, or on information newly developed by test programs which they control directly.
A few examples will serve to illustrate the un
reliability of data obtained from market sources and the magnitude of the effect the choice of specifications has on the utility-per-dollar ratios of goods. A large portion of the products the Government uses is available in "price lines" which presumably vary in utility directly with the price.
87
Teats made by the Government on standard duty, reinforced link, and heavy duty tire chains illustrate the danger of relying on price lines as a measure either of quality or of utility-per-dollar ratios.
The reinforced link chain
sells at 22 percent higher than the standard duty chain, ■while the heavy duty chain is priced at 5>0 percent higher than the standard duty (Table 10).
The
tests revealed that the standard duty and the heavy duty chains of various manufacturers on the average give the same life in actual use, while the re inforced link type lasts 2^0 percent as long as either of the other two.
In
terms of utility-per-dollar the reinforced link chain is twice as good a buy for the Government as the standard duty chain and three times as good a buy as the heavy duty chain. Before the tests were made the manufacturers offered no information which could be considered reliable for writing the specifications for chains. It may be that they did not know themselves what the relative wearing quali ties of the different types of chains were.
It is interesting to note that
the prices vary almost directly with the weight of the chains which is a rough indicator of their costs. Individual prices at which goods are offered for sale, as contrasted with price or quality lines, are obviously no indicators of quality.
The
experience of the Government in contracting, which is discussed in later chapters, shows that price quotations for a contract to supply a specified product will vary anywhere from 20 to 100 percent or more above the low bid. Retail list prices, which serve as the basis for calculating many whole sale prices, are not reliable indicators of quality either.
One study of
3$ commodities showed that the relation between retail price and quality of products designed for the same use was relatively weak.
For 26 of the pro
ducts the more expensive ones were typically of higher quality, but for 9
TABLE 10 Variation in Price, Weight, Wear and Units of Wear per Dollar of Tire Chains between Types of the Same Make 1/
Type of chain
Net price to Govt* per set (dollars)
Weight per set
Variation (percent)
(pounds)
Variation (percent)
Wear index (percent of standard duty chains 100)
tinits of wear per dollar (life of standard duty Variation chains 1*0) (percent
Standard duty
1*.88
100
15.75
100
100
oVI C •
11*3
Reinforced link-
5.95
122
19.00
121
250
.1*2
300
Heavy duty
7.32
150
25*00
159
100
.11*
100
1/ Sources Computed from information in the files of the Federal Supply Service, Washington, D.C* exact date of the tests and prices was not shown, but was between 19i;0 and 1915 •
The
89
the cheaper ones were typically higher in quality than the more expensive
y
ones.
1/ Alfred R. Gxenfeldt, op. cit., Table 3, p. 310. Manufacturers' brand names are similarly unreliable as measures of pro duct quality unless it is definitely known by buyers that the quality con trol methods of the manufacturers are adequate and are consistently applied. Inasmuch as manufacturers are interested in saleability of their products rather than utility, inspection and other control methods may be directed toward insuring that the products' saleability rather than their utility is maintained.
Objective studies made for two commodities illustrate the fact
that buyers are unwise to rely blindly on brand names as measures of quality. Tests under controlled conditions of use of the "first line" tires of eight tire manufacturers, including all the major ones, were made for the Federal Supply Service by the National Bureau of Standards.
The term "first
line" tire identifies the highest quality brand of tire of each manufacturer, all such brands being sold at competitive "price lines".
The tests revealed
that the longest wearing "first line" brand gave 56 percent more miles in service than the shortest wearing "first line" brand (Table 11). The same tests also revealed that the serviceability of different sizes of tires of the same manufacturer and the same brand name varied significant ly.
The brand which gave the greatest wear in the passenger car size ranked
fourth in wear in the popular light truck size, while the brand which ranked fifth in the passenger car size ranked first in the truck size.
These tests
were of the nature of pilot tests to prepare the way for more comprehensive ones to be made later, but they confirmed previous tests conducted under different conditions of use by the Post Office Department.
TABLE 11 Variation in Tread Wear of Automobile Tires between Makes and Sizes of the Same Make 1/
Manufacturer
Average estimated tread wear of tires expressed in percentage of shortest-wearing make 6,00x16, k-ply 7*00x20, 10-ply "first line" tires "first line" tires & Estimated Estimated tread wear tread wear (percent) Rank (percent) Rank
. A
156
1
138
k
B
liiO
2
150
3
C
123
3
158
2
D
122
h
105
7
E
111;
5
191
1
F
11h
6
110
6
G
112
7
100
8
H
100
8
130
5
1/ Sources Computed from information in the files of the Federal Supply Service, Washington, D.C, on tests in use of eight makes of tires completed in 19h9» Tests were only for tread wear, but results were consistent with previous tests made by the Post Office Department, which covered both tread and carcass, 2/ The term Mfirst line” tire originally identified the highest quality line tire of each manufacturer, not a level of quality common for all manufacturers. The 11first line'* tires of all manufacturers are roughly competitive in price, but are not of the same quality. At present some manufacturers make a higher quality line of tire than their "first line" tires.
91
Results comparable to those for tires are shown by tests of 11 promi nent brands of dry batteries of three sizes, which were also conducted by the National Bureau of Standards (Table 12). The results of the Bureau of Standards tire tests are confirmed by tests conducted by a consumer goods rating agency, Consumers Union, which show the variation in quality among competitive brands of tires (not sizes). This investigation also included information on prices and, therefore, pro vides a basis for comparing the estimated tread wear per dollar offered by various brands of tires at retail (Table 13). The examples cited above indicate the magnitude of the effect varia tions in quality can have on utility-per-dollar ratios.
In the cases shown,
the variation, if prices were constant, would be from 56 to 250 percent. Furthermore, in the cases of tires and batteries only the "first line" qualities were tested.
If the various kinds and quality lines are also con
sidered, the pattern of variation is further complicated and the ranges in utility between substitute products further widened.
Including prices in
the calculation may bring the price-quality ratios for competitive products closer together or send them farther apart in magnitude depending on whether the prices vary directly or inversely with quality. It is significant that the selection of the commodity specification must be made well in advance of the purchase.
Because this is necessary,
the magnitude of the utility-per-dollar ratio for the good to be purchased is in substantial part determined from a month to years in advance of the buying transaction. The decision to adopt a specification also affects the chance of maximizing the utility-per-dollar ratio by its effect in determining the number of firms which will bid for contracts.
The products of many or a
TABLE 12 Variation in Life of Dry Batteries between Makes and Sizes of the Same Make 2/
Manufac turer
Average estimated life of tiattery expressed in percentage of minimum required by Federal Specification______ Radio B Flashlight No 6 dry cells D size N size Item 17-B-7210 Item 17-B-7600 Item 16-B-33L0 Life Life Life (percent) Rank (percent) Rank (percent) Rank
A
159
1
135
3
B
157
2
10ii
7
C
150
3
105
6
D
lii6
h
Ujl
2
E
138
5
163
1
F
130
6
100
8
a
G
122
7
120
5
177
3
H
119
8
121
k
181
2
X
116
9
J
109
10
85
9
K
101
11
103
5
185
1
CM
1/ Source: Computed from information on qualification tests for bat teries in the files of the Federal Supply Service, Washington, D.C*
TABLE 13 Variations in Price, Total Tread Wear and Miles Tread Wear per Dollar of Automobile Tires" In $19— *$21; Retail Price Range, Summer 1950 1/ Est. total Ret. list Est. miles price, NIC Variation Rank tread 'near Variation Rank tread wear Variation Rank (dollars) (percent) (miles) (percent) per dollar (percent) Sears Roebuck and Co. "Allstate Premium Quality1’
19.01;.
100
1
33,000
122
3
1,733
li£
3
Montgomery Ward and Co. "Cat. No 6U C 1713 M«
19.01;
100
1
29,000
107
6
1,523
125
h
B.F. Goodrich Co. "Silvertown"
19.79
101;
3
36,000
133
1
1,819
Ht9
1
Goodyear Tire and Rub ber Co. "De Luxe Rib"
19.79
101;
3
36,000
133
1
1,819
1U9
1
Firestone Tire and Rubber Co. "De Luxe Champion"
19.79
10k
3
28,000
101;
7
i,ia5
116
6
U.S. Rubber Co. "U.S. Royal De Luxe"
19.79
101;
3
27,000
100
8
1,361;
112
7
General Tire Co. "Silent Grip"
21.89
115
7
31,000
115
h
1,106
116
5
Seiberling Rubber Co. "Seiberling Safety"
2li.5U
128
8
30,000
111
5
1,222
100
8
l/ Source: Based on test results and prices given in Consumer Reports, Vol. 15, No 11, December 1950. 2/ 6 .00xl6, standard, L-ply, blackwall, "first line".
9k
few firms may qualify as acceptable depending on the quality specified and on the terms and method -used for defining the products' quality.
The goal
is to define the optimum quality of product considering both utility and costs and at the same time to write the specification so that the maximum number of firms m i l be able to bid in competition for contracts.
How success
fully this is done depends in large measure on the methods used in defining the product characteristics*
B.
Methods of Product Definition Government purchasing officials have no objection to the legal require
ment which restricts the Government's product policy to the use of objective commodity specification, except where these are impracticable and specifica tion by the maker's name or brand name may be used, provided the words "or
y
equal" are included.
They would in all probability adopt the technique if
1/ Chapter III, p. h2 and pp. 50— £1.
it were not required, because they believe the use of objective specifica tions is the soundest method of obtaining active competition, and the most
2/ effective basis for making awards of contracts.
The administrative decisions
2/ C.E. Mack, Federal Procurement, op. cit., p. 13ii.
elaborating the details of the product policy have, therefore, encouraged the fullest use of commodity specifications and have permitted the use of alternative methods only where specifications have not been available or have not been practicable.
The alternative methods are two:
ducts lists and brand or manufacturers* names.
qualified pro
Combinations of the three
methods are also used, but whatever the method, the goal is to provide the
most objective commodity definition possible in the given circumstances. Whatever their form, commodity definitions are an integral element of every stage of the purchasing procedure:
invitation to bid, offer of
bids, award of contracts, and final determination of satisfactory perform ance of contracts.
To serve these purposes effectively, commodity defini
tions must (1) define a product which will yield the greatest utility in service per dollar expended if the product is procured at the prices assumed at the time, the definition was developed, (2) provide a definition for in clusion in invitation to bid which will enable potential bidders both to determine whether or not they can provide the desired product and to calcu late the price at which they are willing to offer the product, (3) permit all qualified and wining suppliers to submit bids, (1;) provide a standard for measuring the quality of products offered in bids on the basis of which price offers can be considered and awards made, and (5) define methods of test and inspection by which suppliers and the Government can economically compare products with the requirements of the contract to determine whether or not it has been fulfilled.
1.
Definition of the Physical Product
a.
Objective Commodity Specifications A specification as used in purchasing, is a definition, written in
terms of objective measurements of those characteristics of a commodity or service which define its utility in its intended use.
The measure of such
characteristics and the methods for determining their magnitudes must be such that any qualified person with proper testing equipment is able to duplicate results when measuring identical commodities in different places or at different times.
96
The chief difficulties in drafting specifications, which will satisfy the requirements of an adequate commodity definition, are to insure (l) that they are in fact sufficient definitions of the product's utility in actual use, (2) that they do not exclude any product which will give the desired utility in use, nor restrict the application of efficient materials or me thods of production, (3) that they are easily and inexpensively applied in measuring the product and (ij.) that they define grade and price line offer ing the prospect of the best buy at the time of purchase.
The first three
of these difficulties are principally matters of engineering, while the last is mainly an economic question* The most obvious way to prevent specifications from being undesireably restrictive is to limit the characteristics of the product which are in cluded to the minimum number necessary for adequate description.
This is
a generally accepted rule which permits many designs of products to meet a given specification provided they are equivalent in utility.
The number
of factors required as well as the restrictiveness of any particular factor depend upon how much is known about the relation of the utility of the com modity to its measurable characteristics. The only completely reliable method of measuring the utility of a particular unit of a good is actually to consume it in its intended use. For purposes of buying, such performance tests in actual use must be made in advance of the purchase.
Where such tests are practicable they offer
the best available method both for measuring utility and for avoiding requirements which may restrict ingenuity in production or unintentionally debar potentially successful bidders. The difficulties of applying tests in actual use, however, severely restrict their utility as means of arriving at a definition.
The utility
97
of different units of a maker's product varies, as do the conditions of use by different consumers.
The sample tested must be sufficiently large
to give results -which are representative both of the product and the varying conditions of use.
Such samples must be tested for each seller who wishes
to bid on a contract.
The costs of the tests may, as a consequence, be high
and the time taken to complete them long.
If the contract covers a period
of time with deliveries in small quantities during its life, samples must be tested periodically to insure that the seller's product has not been deteriorated during the life of the contract. While it is not often practicable to apply tests in use directly to define products, such tests still provide the ultimate basis for all me thods of definition.
The difficulties recited above, however, modify the
way in which the method is applied.
Its widest application is as a control
for the development of performance requirements of commodities which can be measured in laboratories by accelerated tests simulating conditions in use.
By correlating the results of such performance tests with the results
of using the products under carefully controlled conditions, the relation ship of the laboratoiy-measured performance characteristics of the commodity to its utility can be discovered.
Often the results of performance tests
can be translated into quantitative measures of utility.
At least they
can serve to array products tested on a qualitative scale in order of their relative utility. Specifications of such performance requirements have a number of important advantages and are used wherever they are available.
They pro
vide the most direct measure of utility short of actual use, they permit compliance to be determined by testing the final product, they are rela tively inexpensive to perform and they can be completed fairly quickly.
98
"Where performance tests are not available, resort must be had to al ternative and less desirable methods.
A method frequently used is to de
fine the product by its chemical analysis or by description of its mechani cal construction details.
These are also based on correlations with the
utility of products in actual use, but the relationship between measure ments of these characteristics and actual performance tends to be less direct than in the case of performance requirements.
They are equally
suitable from the viewpoint of the ease with which tests for compliance may be performed on the final product.
Products which are homogeneous in
use, however, may well be produced by many different methods of compounding and mechanical construction and specifying these details runs the danger of causing the specifications to be restrictive of innovation and of present competition.
When properly devised and revised to keep abreast of new
techniques, however, specifications of composition and mechanical details need not be restrictive. In some cases, where the identity of the ingredients cannot be ade quately determined in the final product, neither of the methods noted above is sufficient to define the products utility, and it may be necessary to specify the ingredients used in manufacture or processing.
This is likely
to be even more restrictive than the specification of composition or con struction and has the additional disadvantage of limiting the possibility of testing for compliance in the final product.
For these reasons specifi
cation of ingredients used in manufacture is avoided where possible, parti cularly since compliance can often be determined only by inspection of the goods in process, which is expensive to the buyer and also undesirable from the maker's viewpoint.
99
In extreme cases it may be necessary to detail the actual process of production to arrive at an objective specification.
This has all the
disadvantages of other methods and is likely to be particularly distasteful to those makers who do not -wish to make their processing techniques avail able to competitors. In practice most specifications include combinations of the types of definition described.
Where possible the Government uses performance speci
fications and resorts to other, less desirable methods, only when lack of
1/ data makes their use necessary.
1 / C •E. Mack, Federal Procurement, op. cit., p. 12f>.
b.
Criticisms and Difficulties of Specifications No criticism has been made of the policy of using objective specifi
cations to define commodities purchased by the Government, but only of particular specifications.
Suppliers, buyers, users, Congress, and interes
ted taxpayers accept the policy as the only one which will at once encourage competition among suppliers, give all suppliers equal opportunity to obtain Government business, and protect the taxpayer against graft and fraud in buying. 3h fact, the most sweeping criticism of Federal Specifications is that they are not sufficient in number to cover the purchasing needs of the Govera2/ ment. A variation of the same criticism is that specifications in some
2/ See Chapter IV, p. 88 for an estimate of the present coverage of Federal Specifications.
instances do not provide for alternative grades of a given kind of product* So long as the grades specified are required for Government use, this is
100
simply additional evidence of lack of coverage*
The effect of this lack
of coverage is that less desirable methods of commodity definition are used in purchasing commodities for which there are no Federal Specifications* The other major criticisms of existing Federal Specifications are: (1) that in some instances they work to restrict competition, (2) that they fail to define commercially standard products, (3) that they are not con sistent with the standards developed by nationally recognized bodies, such as the American Standards Association and the American Society for Testing Materials, and (10 that they define obsolete commercial practice*
All these
criticisms are variations of one charge that Federal Specifications do not define commodities which are standard according to current efficient indus trial practice and which, therefore, cannot be expected to offer the Govern ment the greatest chance of maximizing the utility received for the dollars expended. In most instances it is obviously desirable for specifications to define current practicej
where they fail to do so, their use may have adverse ef
fects both for the Government as a buyer and user, and for the supplying industries.
As a rule nonstandard products are more costly to produce than
standard ones and consequently may well command higher prices for equivalent quality.
Specification of nonstandard products tends to restrict competition
because some potentially successful bidders may be expected to find it un economical to bid on goods, the manufacture of which would entail costly production adjustments* It is clearly advantageous for Federal Specifications to incorporate specifications promulgated by nationally recognized agencies, such as the American Standards Association, when they are generally in use in the indus try and define products required by the Government.
Federal purchasing is
101
then focused on requirements that can be generally met by competing sup pliers and the cost of developing specifications is minimized.
To the ex
tent the Government fails to utilize such standards it fails to make these gains.
It is the established policy of the Government to use such stand
ards, and numbers of Federal Specifications are, in fact, replicas of nation ally recognized standards.
In some instances, however, the standards of
such bodies are not yet used generally by the industry, and even if they are in general use, they may not define the particular quality of product that is most efficient for Government use.
In these cases the Government,
like any large-quantity purchaser, must develop its own specifications to meet its particular needs. The same considerations hold for cases where industry standards exist which have not been promulgated by nationally recognized agencies independent of direct industry influence.
Industry standards, however, are more likely
to be developed with the needs of the manufacturer rather than the user in mind.
They are less likely, for this reason, to meet the needs of the Govern
ment and may well require revision before they can be incorporated into Federal Specifications. On occasion specifications are consciously designed to force departures from established practice and are used to introduce desirable innovations into markets.
The most suitable product for a given use may not be offered
among the standard competitive varieties in the market.
In such cases stand
ards defining new and more efficient products may serve to force their adop tion by competing suppliers.
If the order quantities are sufficiently large
to enable the Government to purchase products containing additional utility than is otherwise available at a favorable price, the Government gains im mediately and the industry may gain in the longer run if the innovation
102
proves to be applicable to a wider segment of the market than that represented by the Government’s demand. It is the basic function of the Government's use of specifications to eliminate from consideration those competitive products which are considered unsuitable or uneconomical for Government use. must be restrictive to be effective.
In this sense specifications
Complaints that specifications are
restrictive arising from the fact that an unsuccessful bidder's product may fall slightly below the specification will always be forthcoming, and while understandable, they are not justified from the Government's point of view as a buyer.
If the complaints reflect the fact that specifications exclude
desirable products because they are unnecessarily restrictive, the offending specifications work against the Government's interest.
Such restrictive
specifications may be caused by the failure of the Technical Committee, which developed them, to keep abreast of current developments in the industry. Where this is true, the remedy is:
consistent and effective enforcement of
the established policy of the Government to review and revise its specifica tions.
Where the restrictive effect of specifications arises from lack of
knowledge of commodity characteristics and the difficulties of choosing factors for defining products which are at once related to utility and unrestrictive with regard to competitive products providing that utility, the question arises as to whether or not some alternative method of commodity specification is not more desirable. c.
Qualified Products Lists Qualified products lists are used by many purchasers in place of
specifications.
As used by the Government, however, they are simply the
result of using specifications to pre-select bidders whose product is accept able for purchase.
The specifications are in every way similar to those
103
described in the preceding section* the difference lies in the fact that a paragraph is added to the specification which states that pre-testing of the product is required as a condition for consideration of a prospective supplier's bid.
Contracts for such products call for adequate check testing
and inspection at intervals during the life of the contract.
Current con
tractors may qualify for bidding on ensuing contracts on the basis of the performance of their product as revealed by such check testing and inspection. If the product of the supplier fails to meet the specified requirements of tests conducted at intervals during the life of the contract, the contract may be cancelled and bids invited for a new one. Purchasing experts have recommended that qualified products lists be used only where (1) it is impossible to write a specification which will eliminate inferior articles, (2) long or expensive tests are required to determine conformity to specifications, (3) complicated testing apparatus not commonly available is required, and (1;) determination of acceptability requires data which can be gained only through the actual use of the pro-
1/ duct.
1/ Detailed Report on the Federal Supply System, op. cit., p. 297.
The Government has made very limited use of qualified products lists. Only £ specifications require that prospective bidders qualify their pro ducts as a requisite for bidding.
Two of these cover tungsten filament
electric lamp globes, one— batteries and dry cells, and two— acoustical 2/ materials and units. In these cases the products are purchased on Federal
2/ As of December 19E>0.
Information supplied by the Stand
ards Division of the Federal Supply Service.
101*
Supply Schedule contracts and while the yearly purchases are large, de liveries are made to many points in small quantities*
Adequate inspection
of the products requires long and expensive performance tests which are not only uneconomical but practically inpossible to perform at the time of delivery in view of the small quantities and the desirability of prompt supply.
Federal Supply Service officials consider it desirable to extend
the use of qualified products lists to other products, but this has not been possible in the past because of lack of funds for testing the products*
The
funds available must be provided by appropriations and Congress has not been inclined to approve amounts adequate for the purpose.
Even where suppliers
pay for the testing, such payments go to the Treasury and cannot be used directly to pay the expenses incurred in testing.
It is expected that the
new provision of the law, which allows such payments by manufacturers to be made into the General Supply Fund and corresponding transfers from the Fund directly to the accounts of the testing agencies, will help extend the use of qualified products lists in the future. The principal disadvantage of the use of qualified products lists is the time and expense required to qualify products and to test to determine whether or not the specified quality is maintained by the supplier during the life of the contract.
Where products can be adequately defined in speci
fications and where inspection of the products at the time of delivery can be made adequately and economically, the normal use of specifications is preferable to qualified products lists. d.
Maker1s or Seller1s Identification A second alternative to the use of objective specifications is the
definition of the product by the maker's or seller's identification, such
as a brand name or catalog number.
This method relies on past experience
and personal inspection, or, in some cases, on tests of samples for de termining the product’s utility.
It is used in the sealed bid procedure
only "when specifications or qualified products lists are not available. It is considered an undesirable method because it fails to provide an adequate definition either for making awards or determining compliance with contracts.
In the sealed bid procedure it must be used with the term "or
equal” following the seller's identification. received on products of unknown quality.
As a result, bids may be
If one of these is low, the buyer
must either make the award to the low bidder and assume the risk that the product may be unsatisfactory, or he may reject the low bid on the grounds that the product offered is not equal to the product named.
In either case
he must be prepared to defend his decision. For the most part the use of sellers' identification is confined to small purchases where the use of specifications is uneconomical and the use of sealed bids is not required procedure.
e.
Comparison of Alternative Methods of Definition Comparison of these alternative methods with the requirements of ef
fective commodity definitions set forth at the outset of this section serves to highlight their relative advantages and disadvantages.
Controlled tests
in actual use are the only adequate ultimate basis for determining which competitive product offered in the market will in fact yield the greatest utility.
All three methods described above are based on the realization
of this fact and it is possible that the product procured by any of the me thods will be the one offering the Government the greatest value. "Where it is possible to construct adequate objective specifications
106
for products, all potentially successful bidders are automatically qualified to bid and the probability of procuring the greatest value is maximized so far as this is determined by unrestricted competition.
Qualified products
lists are more likely to exclude potentially successful bidders, but are preferable to specifications which do not define products precisely, or which are too expensive to use. Compared with other methods, specifications require somewhat more careful consideration by prospective bidders in forming their judgement as to whether or not their products conform to the Government’s requirements.
Manufac
turers who qualify in other respects, however, normally have sufficient techni cal competence to reduce such comparisons to a matter of routine. Specifications require tests to determine compliance, but where com paratively simple tests are available and order quantities are large the unit costs of inspection are nominal.
Where these factors result in high
unit costs of inspection, then the other methods prove to be best. At the time of award objective specifications provide a simple method of determining that the bidder qualifies so far as his product is concerned. The fact that he bids on the specified product is usually sufficient:
de
termination of ultimate compliance with the terms of the contract must in any event await inspection of the delivered product.
Qualified products
lists are equally simple to use in making the award.
The same is true for
seller's identification if the low bidder's product is known to be "equal" to the brand of product specified.
If it is a product of unknown quality,
then the process of award is complicated by the necessity of determining whether or not the product offered can be considered to be "equal". No method is perfectly applicable to all commodities or all purchases, but the Government's policy of applying them seems to offer a constructive
107
solution to the problem of choosing the most effective commodity to pur chase*
2.
Definition of Conditions Surrounding the Purchase The methods of definition described above are confined to the physical
attributes of the product.
These do not, however, embody the whole of the
utility sought in the purchase of many commodities.
Utilities may also be
embodied in the conditions surrounding the sale, such as service agreements, installation of the product, prompt delivery, and convenience of location. The Government's product policy includes definition of any such conditions which are considered important.
If such utilities are not specified, the
contractor is neither required nor expected to provide them.
C.
Formal Procedure for Developing Product Definitions The procedures for developing agency specifications are relatively in
formal, and take whatever form the agency believes to be expeditious and necessary.
This is appropriate because agency specifications are not used,
except occasionally, outside the agency which develops them.
The bulk of
the specifications which are used in Government buying are Federal Specifi cations which are required for general use by all Government agencies, and are widely used by state and local government buyers and by private buyers as well.
These, therefore, have a wide influence and considerable care is
taken to insure, so far as procedures can do so, that the specifications take into account the needs of all agencies and the production and market ing problems of suppliers* Federal Specifications are developed by the combined efforts of the Federal Specifications Board, the 77 Technical Committees, and the Stand ards Division of the General Services Administration, which were described
108
in Chapter II,
Draft specifications are prepared by the Standards Division
personnel and the Technical Committee members who are experts in the com modity fields from various Government agencies.
These are circulated for
comment both among the interested Government agencies and among manufac turers of the product, particularly those who supply it to the Government. With all comments from these sources in mind, a final draft is prepared and after it is reviewed by the responsible Technical Committee, it is promulgated by the Administrator of the General Services Administration and made manda tory for use in purchasing the commodity.
In addition to the full-time ef
forts of the Standards Division staff, this procedure enlists the competence of more than 700 technical commodity experts of the Government who compose the personnel of the 77 Technical Committees as well as the competence of the hundreds of manufacturers who offer specific criticisms of the draft specifications. The nonphysical attributes of the product, such as service, instal lation, and delivery are normally defined by special provisions of the invitations to bid because they vary with individual purchase transactions. No formal procedure is required for defining them.
Msthods of Using Specifications in Buying Basically, objective specifications, as used in buying, provide a defined quality level against which the utility of competitive products may be compared.
The standard so provided can be used in three principal
ways which vary substantially in their effects. The most common method in Government practice is to use the specifica tion to divide all competitive offers into those which fail to meet the requirements and are, therefore, rejected, and those which meet or exceed
the requirements and are, therefore, considered acceptable for purchase. This can be called the policy of product homogeneity since all products meeting the specification are considered to be equally acceptable for Govern ment use.
This method is used in sealed bid procedure of buying in the
great majority of cases where there are no low tie bidders. The second method is to use the specifications to reject all products failing to meet their requirements, and as the basis for comparing the utility of products which equal or exceed them.
This is used in Government
practice on occasion when low bids are tied and award may be made to the low bidder offering the highest quality product. The third method is to use the specifications to compare all the com petitive products offered regardless of whether they fall short of or exceed the requirements.
This method is used in cases where it is permissible to
negotiate contracts and award need not be made to the low bidder, but can be made to the bidder whose price and product offer the greatest utility-perdollar to the Government.
At the time specifications are developed it must
be assumed that they will be used in the sealed bid procedure and, therefore, will define the quality level above which all products will be considered homogeneous for Government use.
Chapter 71 The Nature of Government Contracting
The law, the results of programs of standardization of demand and of centralizing requirements, and the product definitions available, pre determine to a large degree the contracting procedure open to the Govern ment buyer at the time of inviting bids.
There remain available to him,
however, significant variations in contracting which influence his chances of concluding a successful purchasing action.
Provisions Included in Invitations to Bid An invitation to bid is the basic document of the sealed bid pro cedure.
It is a quotation form which provides all the information neces
sary for the bidder to calculate his prices and which, when filled in, signed, and returned to the Government agency, becomes his bid.
In ad
dition it includes all applicable contract provisions and is so written that it becomes an enforceable contract upon acceptance by signature of a responsible Government officer.
1.
Standard Conditions of Contracts The standard form of Government contract contains two provisions
which rank with the legally required features of the sealed bid device in their effect on the decisions of sellers as to what price to quote. One provides for price reductions and the other penalties for default. Government contracts have been called a "one way street” for the reason that one standard provision requires contractors to extend to the Government price reductions proportional to those extended to other
Ill
customers at any time after the date o^Uxe bid while no provision is made for escalator clauses which raise the price to the Government."
1/ This applies to "normal" times.
In
Escalator clauses are
used, on occasion, in periods of rapid general price ad vances •
effect this gains for the Government an advantage corresponding to any reductions in published prices of standard items of suppliers.
If the item
is made to a Government specification and is not standard with the supplier, the provision has no effect and it probably has no effect if the supplier makes unpublished price concessions to customers other than the Government on standard items. If bidders are contemplating price reductions at the time of submitting bids to the Government, they could be eaqpected to increase their bid prices by the amount corresponding to the reduction they know they will have to make later.
Unless the contemplated price reduction is general for the
industry, however, such an increase would lessen the bidder*s chance of receiving award and he might well hesitate to consider it in making his bid. All contracts provide that if suppliers default on contracts, the Government may terminate them by written notice, procure similar goods elsewhere, and collect from the original contractor any excess costs which may be incurred.
This provision is used most frequently in cases where
the supplier delivers goods which fail to meet specifications.
When this
happens attempts are made to obtain prompt replacement of the sub-standard goods from the contractor, or, if the goods are needed badly and are useable, to work out a price adjustment with him which will compensate the Government for the reduced quality.
If the contractor refuses to
Ill
customers at any time after the date of the bid while no provision is
1/ made for escalator clauses which raise the price to the Government.
1/ This applies to '’normal*1 times.
In
Escalator clauses are
used, on occasion, in periods of rapid general price ad vances •
effect this gains for the Government an advantage corresponding to any reductions in published prices of standard items of suppliers.
If the item
is made to a Government specification and is not standard with the supplier, the provision has no effect and it probably has no effect if the supplier makes unpublished price concessions to customers other than the Government on standard items. If bidders are contemplating price reductions at the time of submitting bids to the Government, they could be expected to increase their bid prices by the amount corresponding to the reduction they know they will have to make later.
Unless the contemplated price reduction is general for the
industry, however, such an increase would lessen the bidder’s chance of receiving award and he might well hesitate to consider it in making his bid. All contracts provide that if suppliers default on contracts, the Government may terminate them by written notice, procure similar goods elsewhere, and collect from the original contractor any excess costs which may be incurred.
This provision is used most frequently in cases where
the supplier delivers goods which fail to meet specifications.
"When this
happens attempts are made to obtain prompt replacement of the sub-standard goods from the contractor, or, if the goods are needed badly and are useable, to work out a price adjustment with him which will compensate the Government for the reduced quality.
If the contractor refuses to
112
make a reasonably prompt adjustment, the contract is terminated and bids are invited on a contract to replace the defective goods.
After the
award is made, the original contractor is charged with any difference in the price if it is higher.
If the goods are procured at a lower price,
no charge is made against the original contractor, but repeated instances of default would provide reason for debarring him from bidding for Govern ment contracts. The importance of strict observance of the terms of the contract, particu larly of commodity specifications, is accentuated by this default provision. Contractors who are well established and who have sufficient technical com petence and quality control over their production to work to specifications experience no difficulty because of this provision.
It does serve, however,
to discourage firms which do not have such competence or quality control from bidding on Government contracts because default on a sizeable contract by a small firm may well result in financial failure.
This provision is a
logical and necessary counterpart of the policy of awarding contracts to any low bidder who is considered responsible by the necessarily broad stand ards of responsibility.
2.
Special Conditions of Contracts The special conditions appended to the standard contracts can be
grouped into (l) those serving to define the commodity and its utility, (2) those directly affecting the price to be quoted, and (3) those which require information to facilitate future contracting and the placing of orders under term contracts.
The special conditions necessary in a par
ticular contract may be few or many, simple or complicated, depending on the commodity and the practices encountered in the market in which it is
133
bought* The conditions which concern the commodity, in addition to the re quirement that it be according to specification, may include any of the followings
(1) the submittal of samples with the bid, (2) the submittal
of certified test reports showing the quality of the material to be ship ped, (3) special inspection requirements, (JU) the requirement to name the manufacturer in cases where wholesalers or jobbers are expected to bid, and (5) any labeling necessary to identify the goods delivered with the shipper or the production batch.
All of these provisions are aimed at the
single goal of insuring that the Government receives bids on and delivery of goods of the quality it has decided to buy. Provisions directly affecting the prices quoted include the require ment that prices cover delivery to specified points.
This may require
submittal of a number of prices for a single item to cover f.o.b. various destinations. are specified.
On term contracts maximum quantities on individual orders This protects both the Government and the supplier.
At
times when prices are stable or declining this provision offers the Govern ment the alternative of purchasing large quantity requirements on definitequantity-definite-delivery contracts.
At all times it protects the sup
plier from possible default in cases where very large orders would make it difficult or impossible for him to meet the delivery requirements of the contract and in times of rising prices it provides him the chance to avoid delivering large quantities at low contract prices. Invitations to bid on term contracts require information necessary for future contracting and for placing orders under the contracts for which bids are invited, such as periodic reports by contractors on the value of purchases by the ordering agencies.
When multiple awards are made on groups
nit
of items contractors are required to provide the Government with copies, usually 2,000, of their price lists for distribution to the agencies which will place orders under the contracts.
3.
Other Provisions of Invitations to Bid If special considerations are to enter the making of awards, they
are explicitly stated in the invitations.
This is a matter of policy adopted
to place all bidders on an equal footing at the time of bidding and to avoid public criticism rather than a requirement of law, inasmuch as the law em powers the Government to make award to the bidder whose offer is Hmost advan tageous to the Government". These provisions regarding award, may reserve the right to make dual or multiple awards where alternative sources are desirable to assure adequate supply or to reduce shipping costs;
they may provide for awards on the ag
gregate price for a group of items rather than on prices for individual items;
they may provide for qualification testing in advance of submitting
bids and, in a very few instances, for evaluation of the utility of the pro duct above that specified. A recent provision of contracts is that the contractor must state whether he employs more or fewer than 5>00 persons.
This information is
used to award tie bids to the smallest firm among those making identical offers when only one of the tied bidders employs fewer than 500 persons.
B.
Contracting Procedure
1.
Sealed Bids Action on a purchase contract begins with the receipt by the buyer of
an approved purchase authority or, in the case of stores items, with a stock replenishment request.
These provide the buyer with the necessary
115
Information for contractings
the item identification, including a detailed
description or a reference to a specification, the quantity to be procured, the delivery point, the time -within which delivery is required, suggested sources of supply and often a description of the service requirement of the commodity*
The buyer then selects the appropriate commodity specification
which will normally be a Federal Specification or, if there is none, an agency specification*
If neither of these is available for the commodity, the buyer
must write one for the purpose.
He then prepares the invitation to bid, has
it reproduced and mailed to the list of prospective bidders*
At the same
time a copy of the invitation is officially posted in the offices of the Federal Supply Service and a copy is sent to the Department of Commerce where an abstract is teletyped to the Department’s regional offices and made avail able there to prospective bidders* Normally invitations are sent and bids received by mail.
The interval
between mailing and the official opening of bids may be any reasonable length of time, usually from ten days to two months, depending on the nature of the trade, the location of prospective bidders, the complexity of the product, and whether or not sub-contractors are used by contractors.
Where delivery
requirements or market conditions for the product do not allow sufficient time for use of the mails, bids may be telegraphed. must, however, be written;
Invitations and the bids
they cannot be made orally.
Bids are kept, sealed as they are received, in a locked compartment until the specified hour and date of opening. read, and recorded.
Then they are publicly opened,
Anyone interested may attend the opening and record any
of the information from the bids.
The bids are then tabulated and evaluated.
The award is recommended, approved, and the bid becomes a contract upon acceptance by signature of a qualified Government official.
Copies of the
tabulations and the considerations affecting the awards are preserved and made available to anyone.
The successful bidder is notified of the award,
perhaps simply by the issuance of the purchase order.
He then delivers the
specified material and sends his invoice for payment.
The invoice is held
until the goods are received, inspected, and officially accepted by the agency for which the purchase was made, and is then paid. The two crucial points in the procedure are advertising for bids and the award of contracts.
2*
Significant Considerations in Advertising for Bids Advertising for bids is of crucial importance because it is the
principal determinant of the number of bidders who compete for contracts. The bidders lists, which are the basis for advertising, are compilations of names accumulated during decades of purchasing experience from which the names of sources holding no promise of developing into successful bid ders have been repeatedly eliminated.
On the one hand the lists provide
the essential means of obtaining effective competition, and on the other hand they are the cause of considerable administrative expense in duplica ting and mailing invitations to bid. The general rule is that any seller may have his name placed on the bidders list simply by request and that the Government may remove the name of any bidder who fails to respond to three successive invitations.
The
Government buyers may, of course, and often do, add the names of any promis ing sources they may discover in the course of their work. The net result of this process of addition and deletion is a file
y
which includes more than 19,000 names of prospective suppliers.
1/ This is the General Services Administration list.
Other
These
117
agencies maintain bidders lists of their own. names are coded so they can be included in one or more of 3ȣl6 mailing lists each of which covers a group of closely related items normally sup plied by a single industry or type of firm.
They are also coded by one
or more of ten delivery areas into which suppliers are willing to ship. Invitations may be sent to the firms included in any one or any combina tion of these 3>5>16 lists in any one or any combination of the areas.
The
actual number of suppliers who are invited to bid on an invitation varies from 1$ to as many as 1,000 depending on how many lists are necessary to cover the items included in the particular invitation to bid. When advertising is by telegraph, three or more, usually more, names of suppliers from whom favorable quotations can be expected are selected from bidders lists and invitations are sent only to them. The other methods of advertising— posting invitations and teletyping abstracts to regional offices of the Department of Commerce— were noted above. 3h addition to the advertising done directly by the Government, some publicity is given to the purchase requirements by The Government Advertiser, a privately published weekly the sole purpose of which is to report on Government contracting, and by certain trade journals.
These media inform
prospective suppliers concerning the agencies of the Government which are in the market and the firms which receive contracts.
The information pro
vided by such non-Govemment publications, however, is not sufficiently up to date to enable suppliers to bid on specific invitations. The problem of insuring that all favorable prospective bidders are notified of the issuance of invitations to bid has always been a difficult
118
one for Government officials.
It is politically not feasible and perhaps
economically risky to limit bidders lists to half a dozen or a dozen sup pliers as is done in private purchasing.
All those who desire to receive
invitations to bid and who respond to them must be kept on the lists.
On
the other hand the mere existence of lists does not insure that the maximum potential competition is obtained.
Certainty that the lists are adequate
could come only from intimate knowledge of the industry and channels of distribution from primary producers down to the various points at which the Government might buy, and a constant revision of lists in the light of such knowledge. Furthermore, the mere addition of a prospective supplier's name to a list is often insufficient to induce him to bid.
Lack of familiarity with
Government purchasing procedures, with the requirements of specifications, and fear of "red tape" may be enough to discourage a supplier.
Cultivation
and education of prospective bidders through personal negotiation and ex planations are often needed.
Tdiile this sort of exploratory work is con
ducted on occasion, Government buyers are normally too busy to be able to devote much time to this phase of purchasing.
Attempts have been made
periodically to provide market research programs, but Congress repeatedly has cut the amounts for such work out of appropriation bills.
3.
Significant Considerations Affecting Awards An invitation to bid may be for one or thousands of items and may
result in the award of one or more than one hundred contracts.
For example,
the invitation to bid for Class £l, Part 1, Drugs, Medicinal, Laboratory and Industrial Chemicals, includes not only many items for which prices are quoted directly, but also complete lines of laboratory, industrial,
medicinal and special chemicals, pharmaceutical preparations and biological products which are listed in the contractors* catalogs and for which prices are quoted on the basis of discounts to the Government for all the items listed in the catalogs.
For this class of items there are 132 contractors.
Another example is Class S>3, Drafting-Room and Office Supplies, Part 1, for which there are 103 contractors. Contracts may be let not only for each item, if different bidders are low for different items, but for different delivery points for a single item, if bids are invited for prices in that fashion.
This is illustrated in
Table li; which reproduces a tabulation of bids offered in response to such an invitation.
In the case shown bids were invited on one item for delivery
in various quantities to eight supply c enters scattered throughout the country. Of the lli bidders who responded to the invitation the bids of 6 were rejected because the samples submitted failed to meet specifications or because the bids were not responsive to other requirements of the invitation.
Contracts
were awarded to 3 of the remaining 8 bidders whose bids were low for one or more different destinations. Usually the award of contracts to successful bidders is an automatic process that offers few, if any, complications. ted.
The bids are first tabula
If the low bids are not responsive to the invitation, notes are made
on the tabulation explaining the reasons.
The responsibility of the bidders
is either known from past experience or, if not, can be checked through information readily available.
Award is then made to the lowest responsible
bidder whose bid meets all the requirements of the invitation. arise in three cases:
Problems
(l) where the responsibility of the low bidder is
open to question, (2) where there are tie low bids, and (3) where prices are judged to be unreasonable.
table
iU
y
Bidders’ Prices and Contracts Awarded for Toilet Tissue on Invitation to Bid for Definite Quantity Contracts for Delivery to Various Federal Supply Centers 1/ May 27, 191*8 (Net prices per carton, f.o.b. destination* Prices of bidders awarded contracts are circled)
Bidders
Park Tissue Mills, Inc. 3/ Raycarr Sales Co. bj White Washbume Co., Inc. 5/ Paper Service Co., Inc. 6/~ Walker Goulard Plehn “ Co., Due. Inlander Steindler Paper Co. 7/ Winchester- Paper Co. International Cellucotton Products Co. 8/ Marcallus Falls Paper Mills, Die. S. Freedman and Sons Hanover Paper Corp. Howard Paper Co. Wexler Paper Products Wertgame Paper Co.
1/ Sources
Wash. 3800 cartons 7.21 9.19 9.80 9.85
Cleve* 300 cartons 7.29
Destination and quantity Chicago Atlanta F.Worth K.City 610 650 65o l*5o cartons cartons cartons cartons
10.03 9.85
7.37 9.h7 9.93 9.85
n 1 q . ‘i1 1 1 • ! 'il :< t ' ! . n hr. not the low bidder on other items, in* p r I c e ot. t h ’ s 1 * T. * ’«.i i • 'i !1r-
1;1• : ” .
,\y h»- w n
1k9
■with the expectation of occasionally receiving an award.
The cost of bid
ding is negligible and there is always a chance that an otherwise low bidder will not bid on the current contract.
An analysis of awards made on all
paint contracts let by the Government which totalled $10,000 or more, shows V' that 388 contracts were awarded to 122 contractors. Many of these were 1/ Summary of Awards Subject to the Walsh-Healey Public Con tracts Act, July 19I48— July 19h9} mimeographed, prepared by the National Paint, Varnish and Lacquer Association, Washing ton, B.C. for special finishes required by the Department of Defense, for which par ticular companies received frequent awards;
the contracts for standard
items are, therefore, somewhat more widely distributed than these figures indicate.
It is interesting tonote that about 10 percent of the 1,291
companies in the industry sharein Government business percentage quote for Government
and some far larger
contracts.
The other fact of particular interest revealed by the frequency dis tribution of prices bid is that beginning in 19h9 numbers of bids begin to cluster in the price classes in which the immediately preceding contracts were awarded.
This coincided with the period when sales in the industry i
were declining somewhat from past high levels and numbers of firms could be 2/ expected occasionally to have excess capacity. Under such conditions bid_2/ Sales of paint, varnish, and lacquer totalled $1,0£0 million in 191*8 which was an all-time high, and $91;2 mil lion in 19lt9. After the first months of 19$0, which were comparable to 19h9 in sales levels, sales again rose to new
150
heights.
See Bureau of the Census figures shown in Paint,
Varnish and Lacquer Statistical Handbook, 1950 Edition, National Paint, Varnish and Lacquer Association, Washing ton, D.C. ders would be expected to quote lower than previous contract prices by whatever amount they estimate would be necessary to underbid their com petitors.
The limit to such price cutting would be their marginal costs
of supplying the contract requirements.
During 19^9 and the first part
of 1950, with the exception of the July 19h9 contract, such considerations appear to have controlled the bids of numbers of firms.
During this period
contract prices declined from $2.17 to approximately $1.50.
The $1.50
figure was apparently the minimum which the cost calculations of firms with excess capacity would permit.
The five contracts let at about this
figure were awarded to five different firms, but numbers of firms varying from one to six bid within the $1.50 to $1.60 price class during this period. Manufacturers claim that Government contract prices for paint (this includes all types of paints and finishes) during periods of excess capa city are often well below cost including a "reasonable overhead1’, and may even be below the out-of-pocket costs of the contractors.
At times, they
say, it is more profitable to quote such prices than to pay for idle labor or to risk losing workers who are difficult to replace, as a result of temporary layoffs.
For short periods of time firms may consider material
and shipping costs alone as composing their marginal costs for the order and be willing to supply goods at prices which cover these costs and con tribute something to overhead costs which, at such times, include direct labor costs.
151
Firms may pursue such a policy with impunity for two reasons, first, because the Government is looked upon as a special buyer, whose contracts do not establish precedents for the prices which other buyers consider to be "fair" and, second, because a low bid for one contract followed by a higher price on another does not prejudice the supplier's relations with the Government,
The bids of individual firms, therefore, tend to vary con
siderably from contract to contract depending, apparently, on the shifting relation of their current sales to the capacity of their plant and the re sulting intensity of their desire to obtain contracts. Another factor in quoting prices is the relatively low cost of doing business with the Government, which involves a minimum of sales, advertising, and engineering expense and no risk of credit losses. ceived without the solicitation of salesmen; have any influence on the award;
Invitations are re
advertising cannot possibly
no expense is incurred for a chemist's
time as a part of the sales effort because the Federal Specification pro vides the requirements beforehand. The successful bidders for the white enamel paint contracts were, without exception, relatively small firms which rely for their volume on industrial and local or regional trade sales.
Only two large firms which
sell in nation-wide markets, the Glidden Company and the Sherwin Williams Company, bid consistently, but their prices were just as consistently high. The contracts ranged in value from about $2,000 to $12,000 and are typical of most paint contracts
let by Government agencies.
Purchasing officials report that the large companies are seldom success ful in obtaining contracts for standard paint items. obtain their share of Government business.
They do, however,
Of the 388 contracts exceeding
$10,000 in value, which were mentioned above, 38 were awarded to four
152
national companies, the Sherwin Williams Company, the Glidden Company, the Pittsburgh Plate Glass Company, and the American Marietta Company. It appears that large companies have no cost advantage over smaller ones. Besides, the value of one Government contract is a small percentage of their total sales in any one period. a small company.
The opposite is, of course, true for
Furthermore, in periods of high sales volume, such as
those studied here, national firms may quote on the basis of concepts of average rather than marginal costs.
These could be expected to be higher
than the concepts of marginal costs used by small firms which badly need the business at the time.
Some national companies, such as the E.I. Dupont
De Nemours Company, the Devoe and Raynolds Company, and the National Lead Company quote infrequently, or not at all, for Government contracts for paint.
2.
White Lead in Oil The Government buys considerable quantities of white lead in oil.
White lead is a raw material for many paints and is sold mixed in oil for use by painters, who either mix their own paints or wish to vary the con sistency of ready-mixed paints.
Lead in oil is manufactured like paint,
but the value added by manufacture is small. There are fewer than a dozen firms which make dry white lead from metallic lead in appreciable quantities.
Some of these have a policy of
selling only raw materials to paint manufacturers and do not bid for Govern ment white lead in oil contracts.
Government invitations have attracted a
number of the primary producers of white lead, however, and these are most frequently the successful bidders.
Some paint manufacturers also bid even
though they are in a disadvantageous position because of the small value
added in manufacture.
Occasionally their bids are low, apparently because
they are willing to calculate their prices by adding profits only to the margin required to work up the lead in the oil and to include the dry lead at cost, or because they have a particularly advantageous contract for the lead. Comparison of the Government contract prices with wholesale prices collected by the Bureau of Labor Statistics are available for IShl only V (Figure 2).
Figure 2 White Lead in Oil Government Contract Prices and Bureau of Labor Statistics Average Mill Prices
a.t.5.
J
F
t
q
A
M
J
J
U
S
a
*
D
/st+r
1/ The Government prices are per pound in 100-pound con tainers, f.o.b. Washington, D.C.
The Bureau of Labor
Statistics prices are average mill prices per pound in 100-pound containers, f.o.b. New York City.
The Govern
ment contract quantities vary from 10,000 to 50,000 pounds.
The quantities associated with the Bureau of
Labor Statistics prices are not known.
For the
contracts let from March through November the Government
paid close to 20 cents a pound for the material compared with the Bureau of Labor Statistics average wholesale price of 27 cents.
In this period
the difference was about 25 percent. As would be expected, the Government's prices vary closely with the prices of dry white lead, exceeding them by a margin ranging from about 1.5 cent to k cents a pound (Figure 3).
Figure 3
Government Prices for White Lead in Oil and Bureau of Labor Statistics Average "Wholesale Prices for Dry White Lead
Q G o v Y W tttrf L** d m Oil
B.L.5 D*r VJmrm Le*o
An examination of the tabulation of two typical invitations to bid indicates that although there are comparatively few primary producers and few bidders in the case of this commodity, nevertheless, the buying method appears to elicit competitive bidding for contracts (Table 19).
Eighty-
five companies, most of them paint manufacturers, were solicited for bids and 6 bids were received for each contract.
In both instances primary pro
ducers were awarded the contracts, but in each case at least on paint manu-
TABLE 19
2/ Bidders' Prices for White Lead Contracts Definite Quantity and Definite Delivery Contracts March and October 1950 1/ (Prices per pound, in loO-pound containers, f.o.b. Washington, D.C. Prices of bidders awarded con tracts are circled)
Bidders
Date of invitation to bid and quantity 3-10-50 10-17-50 il0,000 38,000 pounds pounds
National Lead Co., Philadelphia Branch 3/ The John R. MacGregor Lead Co. 3/
.16632
The Mamolith Carbon Paint Co. 3/
.1695
.2300
The White Co.
.1781
.27
The Eagle-Picher Sales Co., Paint and Varnish Division 3/
.1818
Pur-All Paint Products Co., Inc.
.20
.26
Dixie Paint and Varnish Co., Inc.
.21
R.L. Carlisle Chemical and Mfg. Co.
.1*95
l/ Source: Compiled from information in the contract files of the "" Federal Supply Service, Washington, D.C.
2/ White lead, basic carbonate, Type B, paste in oil, in accordance with Federal Specification TT-W-2£>lb and Amendment 1, dated October b, 1915. Item No 52-P-19331. 3/ Primary producers of dry white lead. Other firms are paint com panies which must buy dry white lead from primary producers.
facturer bid prices close to those bid by the primary producers.
3.
Toilet Tissue There are more than 100 mills -which produce toilet tissue.
1/
Most of
1/ One hundred and one firms are listed under "Toiled Paper" in the classified list of products of paper mills and converters in Lockwood»s Directory of the Paper and Allied Trades, 1950, pp. 802— 80l*. While this is accepted as the most com prehensive list, it is thought to be incomplete. these produce the finished product from pulp.
Others are converters--com-
panies which buy tissue paper and cut, perforate, wrap, and package it.
The
tissue from which toilet paper is made may also be used to make other pro ducts, principally wrapping tissue.
The machines which make the tissue may
be specialized for that purpose alone, but more often they can be adapted to make a range of papers of which tissue is one kind.
The production facili
ties and the raw material for toilet tissue can thus be shifted to the production of other commodities with comparative ease. Almost all mills manufacture a product for general sale that meets the requirements of the Federal Specification.
If a mill does not, the Govern
ment buys in sufficiently large order quantities, from 500 to 3,000 cartons of 100 rolls each, to make it economical to adjust machines to produce a paper to meet the requirements of the specification. The demand for toilet tissue is considered to be inelastic over the wide price ranges at which it has sold during the past few years, and is fairly stable over time increasing with the growth of the population.
Sales
of toilet tissue, however, may fluctuate considerably over short periods
157 because of changes in stocks held by dealers and by large users, such as the armed forces*
It is considered to be an essential item during periods of
shortage of pulp because any widespread use of substitutes would quickly cause breakdowns in the plumbing and sewage systems of large cities*
Ample
supplies of pulp were allocated for the manufacture of toilet tissue during World War II for this reason. Sales of toilet tissue are classified by the industry as (l) industrial and (2) resale.
Industrial sales, which include those to the Federal, state,
and city governments, are frequently transacted on a specification basis with price, as a rule, the dominant factor in award of contracts.
In contrast,
brand names count heavily in resale sales which modifies to some degree the influence of price.
A few large companies, such as the Scott Paper Company
which dominates the field, produce and sell nationally advertised brands, but the brand name advertising of the majority of the mills, which are relatively small, is limited and directed more toward wholesalers and retailers than the final consumer.
Both industrial and resale sales may be made either directly
by the mills or by the mills through jobbers to the industrial firm or retail store.
Of the approximately 60 firms which have bid on General Services Ad
ministration contracts during the past two years, half were jobbers and half producing mills (Table 20).
Small mills may rely almost completely upon job
bers for the distribution of their products. Toilet tissue is supplied to the civilian agencies of the Government through the 12 regional supply centers of the General Services Administra tion.
The requirements of these stores are centralized periodically by the
Washington region and invitations are issued for bids on contracts to sup ply definite quantities for delivery to each of the supply centers.
Awards
are made separately on the requirements for each delivery point but, of course, one firm may bid and receive contracts for all of the requirements.
10
TAELE
5/
1/
Bidders1 Prices for Toilet Tisane Contracts, Responses to 23 Invitations to Bid Dated free Kerch 22, 1946 through Wovember 30, 1900 (Vet prices per carton of 100 rolls, f.o.b. Washington, D.C. for definite deliver? of specified quantities. Prices of bidders awarded oentraots are elroled) Date of Invitation to bid and quantity 3-22 2,400 cart. Ashland Paper Hills, Ino.
3/
Resolute Paper Products Corp.
y
i/
11.23 .2S
y 6.00 .oo4
©
T
6-24 1,900 oart.
Bayearr Sales
2/
y Co.
8.79
6.08
6.18
11.23
9.90
©
(© 6.20
7.95
7.10
8.83
7.91
(6.181
8.12
8.20
11.09
11.30
8.25 8.63^
10.78
(9.891 10.29
V 10.34
9.19
Bm&sen Pulp and Paper Corp. Paper Service Co., Inc. Green View Tlaaue Kills, Inc.
9.85
y
1-27 3-4 2,000 3,000 oart. cart.
11.23
10.94 11.46
1-5 2,000 cart*
9.55
9.80^( f l ^
Arlington Sal.a Agano,
Walker Ooulard Plehn Co., Inc.
10-22 2,000 cart*
11.23 11.23 11.23 11.23 " .................
.47 {j O . g j
International Cellucotton Products Co. Park Tlaaue Killa, Inc*
1948 4-26 3-27 7-2 3,000 3,800 5,000 oart. cart. esrt.
© ©
9.90
5.56
4.63
4.63
6.06
6.31
5.77
4.97
5.94
5.84
6.70
6.70
5.10
5.10
5.92
5.60
5.46
6.14
5.56’
6.32
6.17
5.48
5.93
5.44
8.98
7.87
4.99
6,57
Irsonard Tissue Co.
6.08
Winchester Paper Co.
5.38
v
4.57
5.16
5.32
5.18
9,20
8 .2 0
7.78
7.56
9.15
9.27
7.16
7.24
6.25
10.27
8.37
6.40
12.50
11.38
.27
7.63
9.25
5.20
5.50 7.20 7.35
Katlonal Paper Corp. of Pennsylvania
6.47
6.05
Sales International Co.
7.84
6.93
Stevens and Thompson Paper Co. 1/ 2/ 3/ 4/ 5/
(4.09
9.10
9.46
9.46
9*46
9.90
4.96
0.37
r5.18
6.66
4.70
4.95
4.96
(0
5.94
5.52
5.03
4.83
4.83
5.29
5.50
5.50
5.50
4.95
4.95
4.70"
6.19
6.19
6.20
6.50 ,
5.19
4.60
5.46
S.22
4.72
5.03
5.71
5.59 5.72
5.22
(4.631
© 5.43
5.51
5.58
6.04
9.07 10.00
9.66
9.90 11*06
4.65 5.45
6.47 5.28
10.01
5.13
5.63
5.15
5.25
5.39
5.03
5.15
5.47
5.37
5.37
6.08
6.03
6.29
5.17
5.15
9.71
4.90
5.39 6.62
6.50
6.52
6.65
9.75
6.55
8.91 6.79
5.14 5.63
y 7.91
7.91
Source! Compiled from data in the contract files of the Federal Supply Service, Washington, D.C. Thle table includes only those firms which bid on three or more contraots. Toilet tissue in rolls, 1000 sheets to the roil, 100 rolls to the carton, in accordance with Federal Specification UU-P-556b and Amendment 1, Type I. Item Vo 29-P-1020. The bids shown for thisfirm Include those of Its subsidiary company, Whlte-Waahburne Co., Inc. Bid rejected because itfailed to meet product or other specifications of the invitation. Partial award,as the lowestbidder bid only on 500 cartons. 6 The bids shown for thisfirm Include those of Its subsidiary company, Windsor Locice Paper Corp. 7/ Jobber.
/
(£og) 10.04
9.29
5*18
5.40
©
^
0 (Figure U).
Figure it Toilet Tissue Government Contract Prices and Mill Wholesale Prices for NationallyAdvertised Brands and Brands Sold to Industrial and Jobber Buyers
n N*t0, are presented in the following
229
1/ table. This company bid $23.09 a fan f.o.b. factory for the Government TABLE 32 Prices of Federal Specification Electric Fan
Retail price ................................................. Suggested net priceto industrial users
.................
Suggested net priceto dealers (small quantities) Suggested net price
to
dealers (large
...
........
$52.99 40.39 36.36
quantities) ... . . . . . 34.86
Distributors1 p r i c e ......... Price bid for the Government contract
29*58 .............
23.09
Price at which the Government contract was awarded . . . . . . . .
22.24
l/ The prices shown are for the fan of the Hunter Fan and Ventilating Company, the only firm for which comparative prices are available.
The contract price is that of the
Emerson Electric Manufacturing Company, the successful bid der. contract which was more than 20 percent lower than its price to distribu tors for the same fan. fication.
Only three bidders offered fans meeting the speci
The Emerson Electric Manufacturing Company was awarded the con
tract at the price of $22.24 f.o.b* shipping point;
the Hunter Fan and
Ventilating Company whose bid of $23.09 was discussed above, was next to the lowest bidder;
and the third low bidder was Robbins and Myers, Incor
porated at $24.40 (Table 33)•
The General Electric Company and the Westing-
house Electric and Manufacturing Corporation bid through their distribut ing companies on their fans which failed to meet the specifications.
The
only other bidder was the A.C. Gilbert Company whose fan also failed to
table : 33
y
Bidders1 Prices and Evaluation of Utility of Electric Fans Offered in Response to Invitation to Bid for Contract for 19,192 Fans April It, 1950 1/ Performance characteristics Bidders Watts input (specifi cation 80 maximum)
Evaluation of utility above specified requirements h/
(PT) (A) Pounds Net price thrust each f.Oob. (specifi shipping cation .90 point minimum) (dollars) =RPT)
A.C. Gilbert Co.3/
(c) Cost of operation for 5,000 hours at 20 per KWH (dollars)
(E) Credit for Evaluation ability to factor deliver air E=A+C-C(l-£g) above speci fied minimum
19.98
Emerson Electric Mfg. Co*
55
1.12
22.21;
5.50
Hunter Fan and Ventilating Co,
62
.93
23.0S
Robbins and Myers, Inc,
60
1.05
Westinghouse Electric and Mfg. Co. 3/
77 110
General Electric Supply Corp. 3/
c C i-S g )
1.08
26.66
6.20 '
.20
29.00
2l;.li0
6.00
.89
29.51
.99
22.25
7.70
.70
29.00
1.12
25.1)3
11.00
2.16
3lu27
Z3o
(See next page for footnotes)
TABLE 33
(Continued)
1/ Source: Confuted from information in the contract files of the Federal Supply Service, Washing ton, B.C. 2/ Fans, electric, 16-inch, 115-volt, 60-cycle A.C*, oscillating, 3-speed, in accordance with Federal Specification W-F-lOla and Amendment 2, except that either rip or non-rip type of cord will be permitted under paragraph E-ll, and under Table I the minimum pounds thrust for the 16-inch fans shall be .90. Item No 17-F-750. 3/ Bids rejected because fans offered failed to meet specifications. Performance characteristics for Westinghouse and General Electric fans are included for purposes of illustration only.
k/ The evaluation factor is used to evaluate only the performance of fans in excess of that speci fied. The specification requirements define a minimum quality that fans must meet for bids to be considered* The formula for calculating the evaluation factor is E=A+(*10
JfflNJ.
FT
in which
E = evaluation factor; Axnet price of fan; .lOsconstant, equivalent to the cost per watt over a period of 5,000 hours at 20 per kilowatt hour; MWfrmaximum watts input permitted by the specification; WIswatts input of the fan as measured by the National Bureau of Standards; BPTarminimum pounds thrust required by the specification; and PTxpounds thrust of fan as measured by the National Bureau of Standards* For purposes of showing separately the two factors, (a) cost of operation for 5,000 hours, and (b) the credit for ability of the fan to deliver air above the specified irdnlmum (pounds thrust) the formula has been rewritten in this form:
E*A+C-C(l-S~) where C cost of operation for
5,000 hours at 20 per KWH (in the original form of the formula C=.10 MWIx-22) and C-C(l-&2£) MWI pt credit for ability of fan to deliver air above the specified minimum.
w
232:
meet the requirements of the specification* Contracts for electric fans are awarded to the bidder whose offer re sults in the lowest evaluation factor rather than the lowest price.
For
fans the evaluation factor is the net price of the fan plus its cost of operation for 5>000 hours (about ten years of operation in service) less the portion of the cost of operation attributable to the amount of air de-
1/ livered above the minimum specified.
Bidders are required to furnish the
1/ For a more complete explanation of the formula for calcula tion of the evaluation factor for fans see Table 33 > footnote i|. technical information necessary to calculate the evaluation factor;
this
information is also available from the tests which are made on the samples submitted with the bids. The calculations for the evaluation of the bids received in response to the invitation of May 1950 revealed that the Emerson Electric Company's fan was not only the lowest in price but was also the most efficient of all the fans offered for sale to the Government.
While the use of the
evaluation factor in this case resulted in award to the bidder offering the lowest price as well, at times it results in awards to bidders whose offers are not the lowest in price but are the lowest in cost to the Govern ment when operating costs are added to the purchase cost of the fans* For commodities, such as fans, which require years to consume, not only the efficiency of operation but the costs of repair and maintenance and the serviceable life are of great importance in determining utility. These factors are not evaluated for fans when making awards, but they are taken into account in the minimum requirements of the specification.
Dura
bility, low maintenance costs, and efficiency of operation are the principal
V
differences between the Government specification fans and those which are offered generally in markets. 2.
Venetian Blinds i,, Hundreds of firms which typically sell in local or regional markets
manufacture Venetian blinds.
The majority of these firms buy the slats,
tape, cords, and hardware from parts manufacturers and confine their pro duction to assembly and installation of the blinds.
Designs differ widely
in durability for different manufacturers, and often vary for one manufactu rer at different times depending on his source of supply for the parts. Installations are priced individually, tailor-made for each job and sold by the manufacturers either directly to the user or billed through contractors, retail stores, or interior decorators.
The products of com
petitive firms are highly differentiated materially both with respect to durability and service. Until the early nineteen-forties the Government, like any other buyer, found it necessary to buy Venetian blinds from local suppliers.
Difficulties
of insuring the purchase of adequately durable blinds and of repair and maintenance led to the development of a Federal Specification and the use of Federal Supply Schedule term contracts through -which the requirements of all the agencies of the Government could be supplied. The specification was developed with the aid of reputable firms in the industry and defines blinds which are not identical to those offered by any firm in the industry, but can be made by any firm inasmuch as the parts, while of high quality, are standard and available from the manufac turers supplying parts to the assemblers.
Hi addition to barring the use
of inferior parts, the specification limits the types, classes, and sizes
of blinds to the minimum number which would adequately serve the needs in order to increase quantities of each item purchased.
The result is a bet
ter product, the receipt of bids from the better established primary sources, increased competition, lower prices, and cheaper and more adequate main tenance*^ A rough idea of the importance of the Government contract to a sup plier is provided by the fact that the Government spent about $80,000 for Venetian blinds in the year ending June 30, \9hl-
The amount is substan
tial, but would not compose a major portion of the yearly business of a well established firm.
Individual orders vary in size according to each
installation and are placed under the term contract by the using agencies at whatever time they have requirements to fill and budgeted funds to cover the purchase.
They compare in size, with the usual orders received by the
suppliers from other buyers* The price paid by agencies ordering locally before the specification was promulgated averaged 36.7 cents a square foot, which was considered to be in line with prices paid by comparable purchasers.
The price immediately
after purchases were shifted to the term contract based on the new specifi cation calling for a substantially improved product, was 20 cents a square foot or about bS percent lower than the previous price. More than 2£0 firms are invited to submit bids and usually more than 20 bids are received.
Many bids are rejected because samples fail to
meet the specification in some significant respect.
Still a half dozen
or more bids are responsive and these reflect independent attempts of firms to obtain the awards by quoting favorable prices*
23f>
3.
Steel Filing Cabinets The use of filing cabinets by the Government is severe and as the
Government fully expects to be in business during the forseeable future it finds it economical to buy long-lasting equipment.
Although this is
also true of most users, manufacturers have found that the saleability of filing cabinets does not require the delivery of the maximum utility-perdollar of sales price to buyers.
Principally for this reason, but also
because cabinets of manufacturers differed in color and dimensions, the Government developed a Federal Specification calling for a special design of cabinet which is more durable than the highest quality cabinets regular ly sold by manufacturers, termed by the industry "Grade A" cabinets. Government specification cabinets are now purchased, not only by the Government, but by large-quantity users such as insurance companies and railroads.
The market originated for Government purchases has thus broaden
ed to include additional buyers.
A number of the large-scale producers of
steel office furniture are tooled to make the Government specification cabinets.
While it is at times possible for small-quantity purchasers to
buy Government specification cabinets through usual retail outlets, manu facturers and retailers prefer to promote the sale of other grades of cabinets. Before World War II the Government was able to buy filing cabinets on term contracts at what were considered to be favorable prices.
During the
war, however, steel cabinets were not produced and even wooden ones were difficult to procure.
As a result of shortages, Government agencies were
encouraged to buy locally.
By 19U7 steel equipment was appearing again.
Prices were high and the agencies were seldom able to procure Government
specification cabinets but -were forced to buy the lower quality commercial "Grade A" cabinets.
In 19li7 when the Government decided again to centralize
its requirements, manufacturers were reluctant to bid.
They were having dif
ficulty in procuring the amount of steel required to fill the orders from their dealers and also they preferred to sell to the Government through their regular channels which gave them larger profits than they could ex pect from competitive bidding for Government’s centralized requirements. Faced with this situation the Government took advantage of the fact that its requirements for high quality filing cabinets are a sufficient pro portion of the total demand to enable it to influence sellers' policies. A regulation was issued requiring that all requisitions for cabinets be submitted to the Federal Supply Service in Washington for procurement.
A
survey of manufacturers revealed that one company was willing to allocate a portion of its production to fill Government orders, although this was not enough to meet all requirements.
Bids were invited and the contract
was awarded to this firm which was the only manufacturer to bid and the only bidder who offered a Federal Specification cabinet. Subsequently, the discontinuance of purchases by agencies through dealers made it impossible for the dealers to utilize their full alloca tions from their manufacturers. As a result a number of manufacturers became willing to quote directly to the Federal Supply Service.
By "drying
up" the demand on dealers the Government was able to use its monopsonistic power to make it profitable for manufacturers to open up primary markets for its purchase.
This is, of course, possible only where the Government
requirements are a significant proportion of the production in the industry and where the type of good and the demand for it are of such a character that its purchase can be postponed for the time required to make the manu-
237
facturers feel the loss of sales. The Government is able to buy filing cabinets at prices below those at which manufacturers sell to dealers,
A comparison of the prices paid by
the Government during the Fall of 19h9 with dealers* list prices is shown
y
in the following table.
-
It reveals that the Government is able to buy at TABLE 3h
Steel Filing Cabinet Prices, l.c.l., f.o.b. Destination Fall of 19h9 Shipment zone
Dealers' list price (dollars)
Dealers' net price assuming 36 percent dealers' discount (dollars)
Government contract price (dollars)
Eastern
69.75
i*l*.61*
38.60
Central
76.75
JU9-12
1*0.02
Western
83.75
53.60
l a . 85
1/ Dealers' list prices were obtained from manufacturers1 price lists.
Exact dealers1 discounts are not known but are believed
to be 36 percent0 Government contract prices are from contract files of the Federal Supply Service, Washington, D.C. from l+O to 1*5 percent off list prices compared with net prices to dealers which are 36 percent off list.
Direct comparisons with prices paid by
other large-quantity buyers are not available but these prices are believed to be the lowest offered by manufacturers to any buyer.
The advantage to
the user agencies is obviously great inasmuch as they would otherwise pay net prices which experience has shown average about 15 percent off dealers* list prices. An examination of the bids received in response to five invitations
238
issued from August 19h7 through July 1950 shows that in 19U7 the only manu facturer to submit a bid for cabinets which met the Federal Specification was the Art Metal Construction Company (Table 35)*
Five dealers* bids were
rejected because the products offered failed to meet specifications.
3h
19h9 and subsequently a dozen additional manufacturers bid but many of them were unable to offer a cabinet which met the requirements of the specifica tion.
By 1950 five manufacturers whose products met specification require
ments were bidding for contracts apparently independently and competitively. Some of these were still unwilling to commit themselves to supply the entire demand of the Government and dual and multiple awards were necessary to in sure procurement of all requirements.
Purchases of filing cabinets in Fiscal
Year 19k9 totalled $U,l50>000. il. Wood Furniture The wood furniture industry is one in which the saleability of the product depends to a large extent upon whether or not superficially it ap pears desirable.
Furniture has utility because of its characteristics
which make it pleasing and acceptable in appearance as well as because of its durability, comfort, and convenience in use.
Inasmuch as it is ordina
rily sold to store buyers who are interested in its saleability, there is a heavy emphasis on appearance, and durability and convenience in use are secondary, although still important, factors. One result of this emphasis on saleability is periodic style changes. The most important period for selling furniture in primary markets is during the yearly furniture shows at which all manufacturers display their lines of products and buyers view them.
Manufacturers feel the need of making an
impression each year at the shows by displaying and promoting some new designs, whether or not they are materially different from previous ones.
TABLE 35
2/ Bidders' Prices for Steel Upright Filing Cabinets Contracts Term Contracts for Indefinite Quantities and Indefinite Deliveries
19U7— 1951 y
(Prices per cabinet, f.o.b. shipping point. Prices of bidders awarded contracts are circled)
Bidders
Art Metal Construction Co.
8-8-l*7 through 2—8—2*8
Term of contract 3-T?-H9' 9-23-1*9 1-31-50 through through through 6-30-1*9 1-31-50 6-30-50
7-1-50 through 1-31-51
< ^ /
(1*3.Op)
ff^O)
(js3o)
(^38.30)
(37^)
(38^20)
Arnot and Co.
52.00
The Albert Han lon Co.
1*1*.8£
Griffith-Koch and Co., Inc.
15.60
The Walcott Taylor Co., Inc.
1*9.35
The Walten M. Ballard and Co.
JU5.68
(
3/ 3/ 3/ 3/
The Bentson Mfg. Co.
3/ 1*0.71*
38.21*
Columbia Steel Equipment Co.
50.02
3/ 1*1.30
Harrison Sheet Steel Co.
, 3/y 1*1.00
Hillside Metal Products, Inc.
38.85
Security Steel Equipment Corp.
(jSTsxj)
All-Steel Equipment Co., Inc.
3/ 39.30 3/
(36722)
©
3/
38.1*0 (Continued on next page)
3/
l a . 20
J/
37.7 r
38.?r
^ 6 ^22)
39.12
( 39^ )
(390)0)
TABLE 35 (Continued)
Bidders
8-8-l*7 through 2—8-1*8
Term of contract 1-31-50 ■ 7-i-5o' 5-19-1*9 $-25-1*9 through through through through 6-30-1*9 1-31-50 6-30-50 1-31-51
Capitol Office Supply Co.
3/U/ 38.00
The Globe Wernicke Co.
1*6.80
2/
Brown Morse Co.
1*0.00
Miller Desk and Safe Co.
, i/y 1*0.00
Steel Furniture Mfg. Co.
3/ 53.37
Genessee Office Equipment Co.
3/1*/ 1*5.00“
Lyon Metal Pro ducts, Inc. The General Fireproofing Co.
3/ 35.8r 1*2.12
1/ Source: Based on data In the contract files of the Federal Supply “ Service, Washington, D.C. 2/ Sections: steel, l*-drawers high, one-drawer wide, letter size, with out lock, olive green finish, in accordance with Federal Specifica tion AA-F-791b. Item No 26-S-16030. ;)/ Bids rejected or not considered because samples submitted failed to meet specifications.
hf Prices quoted only f.o.b. destination; f.o.b. shipping point prices shown were estimated for purposes of comparison.
This has led to a strong emphasis on immaterial differentiation and a tend ency, in some cases, to save in costs by skimping on hidden construction details which affect durability. The industry is one in which changes can be made to meet particular specifications and design requirements in reasonably small quantities.
The
cost of special designs and patterns can be absorbed in the total unit costs of perhaps a 100 pieces without bringing such costs out of line with those of standard designs. Manufacturers are many and widely scattered geographically although there are centers, such as High Point, North Carolina, Grand Rapids, Michi gan, and Chicago where plants cluster heavily.
Many specialize in case
goods or upholstered furniture, high quality or lower grades, or in modem, period, or traditional styles.
All sell their output through department
stores, retail furniture stores, or interior decorating establishments. The products of each are both materially and Immaterially differentiated from the Government's viewpoint. The Government buys executive type wood office furniture and household and quarters furniture from the manufacturers.
In both instances specifi
cations defining special products have been considered necessary in order to insure durability and functional interchangeability of the products pur chased.
In contrast with other products previously discussed, interchange
ability in use is very important for furniture.
Under the sealed bids pro
cedure different manufacturers may be awarded contracts over periods well within the life of the furniture previously procured, and the specifica tions must insure that the products of any contractor will be usable in combination with the products of past and future contractors.
In addition,
the products of different manufacturers vary so greatly in durability that
2h2
minimum quality requirements are necessary if the Government is to have any chance of maximizing the utility-per-dollar in buying furniture.
Both
executive office and household and quarters furniture are alike in the respects just noted, but they differ considerably in other respects and can best be discussed separately. The executive type furniture and furnishings purchased by the Govern ment are entirely special designs defined by detailed specifications and design drawings.
This is necessary both for the reasons noted in the pre
ceding paragraph and also to prevent competition among high-ranking Govern ment officials in furnishing offices.
The needs of the officials who are
entitled to use this type of furniture are common to all and the Govern ment is, therefore, willing to eliminate personal preferences entirely and to make a common decision as to the appropriate design.
The specifications
define a style of furniture that is comparable with the best offered through regular market channels for the same use and specify construction features that give it maximum durability. This kind of furniture is bought under Federal Supply Schedule one-year term contracts let by sealed bids and normally with single awards to the low bidders for each item.
The Government reserves the right to make awards
to other than low bidders and may require production samples to be sub mitted for examination and test prior to making awards.
Thus, unusual con
siderations are permitted in making awards to insure delivery of the speci fied high quality product.
The procedure does, of course, tend to limit
the number of competitive bidders because of the time and money a firm which has not supplied the product must expend to provide samples and assure the Government that it is in a position to deliver the products according to the conditions of the contract.
For the year ending April 30, 19!i>0 con
2l&
tractors reported about $5>00,000-worth of sales under the contracts for furniture and furnishings of this type, with about 90 percent of this amount accounted for by desks and chairs. Price comparisons are not possible because, although the Government does not prohibit it, the same items are not offered regularly to other buyers, the furniture sold by manufacturers generally is highly differen tiated, and there is no information for comparing quality. furniture varies greatly in design and sells at high prices.
Executive type It is the
opinion of Government buyers and suppliers of this type of furniture that the Government buys at prices much lower than it would pay if it, like most industrial firms, considered the furnishing of the offices of high-ranking officials to be individual decorating problems and as a consequence bought furniture in small quantities. There are usually a dozen or more bidders for contracts for executive type furniture, half a dozen of whom, have supplied these items in the past and bid competitively.
Other firms from time to time bid for contracts,
but their bids often run double or more those of firms which have had past experience with this business.
Thus, while the Government does obtain a
measure of competition, the entry of new competitors is made very diffi cult by the required investment in patterns, designs, samples, and sales effort to assure the Government that the company will be reliable source of supply.
A large part of this expense must be incurred before the award
and the uncertainty of bidding in competition with firms which have al ready absorbed this initial expense discourages many firms from bidding for contracts.
The biying of household and quarters furniture differs from the pro curement of executive type furniture in that the personal preferences of individuals who must use the furniture are considered to he important.
In
order to satisfy individual preferences and at the same time buy furniture that will be interchangeable with past and future purchases approximately the same technique is used as in the purchase of rugs and carpets.
Styles
and patterns produced in quantity by the industry are specified by drawings, but minor variations not affecting interchangeable use of the item are per mitted.
Quality is defined by a specification which is in part a perform
ance and in part a construction specification.
Where fabrics are involved
the number of patterns and kinds and grades of fabrics which must be offered is specified and bidders are required to furnish samples of the selection they will offer before contracts are awarded.
These samples then become
the standard selection for Government purchases and sets of them are made available to the ordering agencies.
The resulting furniture is of a quality
and design that may not be standard in the regular production of any manu facturer, but which can be produced by any well equipped firm in relatively small quantities* To a lesser degree than in the case of executive type office furni ture, investment required in designs, patterns, samples, and sales work together with the uncertainty of being the low bidder, restrict the number of firms which find it profitable to bid.
An indication of this situa
tion is given in the following table which shows the number of firms sub mitting bids in comparison with the number invited to bid.
Each class of
furniture shown in the table includes numbers of items on which separate
2k5
TABLE 36 Number of Firms Responding to Invitations to Bid on Contracts for Household and Quarters Furniture
Class of furniture
Term of contract
Number of firms invited to bid
Number of bids received
8-1-50 through 7-31-51
Early American design
272
8
5-1-50 through U-30-51
Upholstered living room
2la
lit
10-1-50 through 9-30-51
Traditional and modern
I4J4O
25
11-1-50 through 10-31-51
Rattan
65
'3
prices were quoted.
For many items only one or two bidders submitted offers.
Bidders for the most part are manufacturers although jobbers and agents bid. Contractors are almost without exception manufacturers.
Multiple awards
are made if prices are not considered to be excessive in order to reduce delivery costs which are in most cases not included in the price, and to insure satisfactory supply.
5.
Post Office Trucks An inappropriate specification can call for special production opera
tions that substantially increase costs without adding utility that could not be obtained by less costly operations.
An outstanding example of such un
wisely developed specification is that by which Post Office Department trucks were purchased in the past* Post Office trucks are subjected to exceptionally hard service be cause of the frequent stops and starts, the heavy traffic in which they
2i|6
must be driven, and the loads which must be carried.
Because of this
heavy service as well as the demands for safety of mails in transit, the trucks must be made to Government specification. The specification used up to I9I4B called for a sturdy truck that had been proved durable and efficient in service, but was very costly because of the many special features required by the specification.
The specifi
cation was, in fact, outmoded and manufacturers disliked bidding for con tracts to supply the trucks. trucks as complete units.
At one time, only one supplier bid to furnish
After the close of World War II when the Federal
Supply Service centralized the purchase of automotive vehicles, purchasing officials together with the Post Office authorities and representatives of the industry, gradually brought the specification in line with industry's practice without sacrificing the serviceability or efficiency of the trucks. Beginning with the 19l|.8 purchases, changes were introduced, as they were proved to be wise, until by 19!?0 the truck specified was as nearly in conformity with the production methods commonly used by manufacturers as the special nature of the use permitted.
The result was an increase
in the number of bidders until all the major truck manufacturers were bid ding, and a drop in the contract price from $2,220 in January 19 W to $l,2jll3 in July 1950. shown in Table 37.
These and the prices for intermediate periods are It is revealing to note that this marked downward
trend in contract prices was obtained at a time when the trend in whole sale truck prices was slightly upward (Figure 12).
21*7
TABLE 37 Prices of Post Office Trucks and Quantities Purchased
Number of trucks purchased
Price per truck (dollars)
Index
Contractor
January 9, 191*8
1,1*80
Ihtemat. Harvester Co.
2,220
100.0
December 10, 191*8
1,200
Fargo Motor Co.
2,178
98.1
September 12, 191*9
1,800
Ford Motor Co.
1,515
68.2
June 12, 1950
250
Ford Motor Co.
1,51*2
69.9
July 11, 1950
3,750
Fargo Motor Co.
1,1*1*3
65.0
Date of invitation to bid
a
Figure 12 Indexes of Government Contract Prices for Post Office Trucks and Bureau of Labor Statistics Average Wholesale Prices for Trucks (January 191*8 s 100)
B. L.S.
C.
The Effect of the Government*s Purchasing Policy The products of all sellers of Government specification products are,
of course, homogeneous in use and once a number of suppliers enter the market the sealed bids device operates just as it does in markets for homo geneous productso The Government’s demand for the products constitutes the major portion of the total demand in the market, or all of it, as in the case of Post Office trucks.
In all cases, however, suppliers can easily shift productive
factors to the fabrication of other products and for this reason the supply of the Government specification products is very elastic and the Govern ment’s monopsonistic position gives it little control over price.
The
reasons for purchasing special products and the consequence of such action shed some light on the operation of purchasing policy. In markets generally producers most often take the initiative in de signing the products offered.
The existence of materials, skills, and
inventive ingenuity, however, does not automatically insure that products embodying the maximum utility per unit of resources expended in their pro duction will be offered in the markets.
In its effort to increase profits
a firm focuses its attention on the saleability and costs of its product. If a firm can increase its revenue by making its product more saleable at no increase in costs, or decrease its cost without sacrificing saleability and, therefore, revenue, it can increase its profits.
It can also increase
its profits over longer periods of time by decreasing the serviceable life of the product if this does not decrease its saleability.
Inasmuch as
saleability depends upon the immaterial characteristics of the product which give it no utility as well as the material characteristics which give it utility, the desire to increase profits often results in a failure
to produce goods that give the maximum utility-per-dollar to buyers. The principal check against the tendency toward high priced low quality goods which is introduced by the desire to maximize profits is the ability of buyers to distinguish the material product characteristics of commodities from the immaterial and to choose, the product that offers them the maximum utility-per-dollar.
To the extent buyers act in this
rational manner the saleability of the product is determined by its utility, and product differentiation is directed toward offering additional utility to buyers, rather than immaterial claims of utility.
Large-quantity pur
chasers, such as the Government.are, naturally, in an advantageous position to conduct the product research necessary to measure the utility of goods. In the process they often find that the existing state of knowledge allows the manufacturing of a product which would offer greater utility-per-dollar than any existing in the markets. When buyers take the initiative in introducing new products they may also find it necessary to take the responsibility for keeping the designs abreast of new technological developments.
This is particularly true where
the product's lack of saleability limits the demand largely to the innova ting buyer.
The seller in such cases has small interest in improving the
special product.
Improvements in technology applied to the standard pro
ducts sold by the industry may lower prices or improve quality and make them better buys than the special item.
The advantage of the special item
at the time it was designed may in this way be lost unless the improvements are incorporated in it also.
It may also be that the original design was
more costly and the price correspondingly higher than necessary.
A com
bination of these factors operated in the case of Post Office trucks with the consequence that costs and prices were higher than necessary to provide
250
the required utility. This problem of keeping specifications in line with the best current practice is present for all commodities, but where specifications define products which are standard in the production of sellers' firms, the sel lers take an interest in urging revisions to bring them up to date.
They
may have no incentive to suggest such changes if the products are specially produced for the buyer.
Chapter X Buying in Markets TOiere the Sealed. Bids Device is Ineffective
A.
Characteristics of the Markets Ih all the markets discussed thus far the sealed bids device brings
some degree of price competition either because it fits Government buying into existing market practice or because, in combination with large order quantities, it induces sellers to depart from their policies of quoting stable prices backed by sales promotion of product differences and to quote competitively for Government contracts.
The markets for Government specifi
cation products are unique because sellers do not find it profitable to pro mote their sale widely, but, in the ones discussed, a degree of price com petition is also obtained. There are two significantly different types of markets in which the sealed bids device does not prompt direct price competition:
(1) those in
which the reason for the ineffectiveness lies in the price policies of sel lers, and (2) those in which the reason for the ineffectiveness lies in the product policies of the sellers.
In these markets, discussed in the present
chapter, the Government, in an effort to obtain price concessions from sel lers, either supplements the sealed bids device with other measures, or abandons it in favor of direct negotiation with suppliers. In the first group of markets sellers either quote to the Government their established price lists or in accordance with uniform price policies which eliminate active price competition.
The products of competing sel
lers are considered by the Government to be homogeneous.
Sellers and
private buyers may also consider the products to be homogeneous.
In many
252
cases, however, buyers, aside from the Government, consider them to be dif ferentiated by characteristics which are— in the Government’s judgement— in some cases immaterial and in others material. a Government specification product.
In one market the product is
Except for the effectiveness of sellers’
price policies these markets are similar to those previously discussed. markets are not numerous, but are quantitatively important.
Such
They include
markets for electric light bulbs, automobile tires and tubes, and steel of fice furniture* In the second group are markets in which the products are sufficiently different from the nearest substitutes so that the Government finds it profit able to buy them without direct price competition for contracts.
The Govern
ment is willing to pay a higher price rather than to accept a remote sub stitute.
Multiple awards are made to all bidders offering makes which are
demanded by the using agencies and which are considered to be priced fairly in relation to close substitutes. ment purchasing.
The products are very important in Govern
They include business machines, scientific equipment,
pharmaceuticals, and various kinds of repair parts.
1/
B.
The Evidence on Prices and Bidding
1.
Markets Where Sellers’ Price Policies Make SealedBidsIneffective
a.
Electric Lamps The markets for electric lamps are dominated by the General Electric
Company and the Westinghouse Electric Corporation, which are the only ones 1/ The evidence presented below was obtained from the files of the Federal Supply Service, Washington, D.C.and from and suppliers, except where specifically noted.
buyers
1
producing complete lines of lamps.
Sylvania Electric Products, Incorporated
is a large company, but it occupies a subsidiary position to the two major producers in the industry.
Hi addition to these three, there are smaller
companies which, although they produce limited lines of lamps, are important in the markets for specialized kinds, such as miniature lamps, flourescent lamps, flash bulbs, silver bowl lamps, or projection lamps. Electric lamps of competing manufacturers are dimensionally and function ally interchangeable in use.
Lamp bases and threads are standardized for the
industry and shapes and general overall dimensions are substantially the same.
Lamps of most manufacturers meet the minimum requirements of Federal
Specifications, but they are to some degree materially differentiated in length of life.
The standard kinds and sizes-of lamps which are sold in
volume are made by highly mechanized methods and the investment required for tooling is high. The two dominant firms pursue identical price policies.
These consist
of selling through authorized distributors and quoting prices as list prices less discounts which vary for different classes of trade and for different yearly total values of purchases.
A distinction is firmly maintained be
tween buyers who purchase for use and those who purchase for resale. Small quantity users purchase at the retail list price.
Contract
users buy at discounts which depend on the yearly net value of their pur chases.
These discounts range from 26 percent for annual purchases of
$300-worth to a maximum discount of 1*0 percent for annual purchases total ling $200,000.
Information is not available to show what prices are paid
by large-quantity buyers, such as the automobile industry, who buy lamps for resale as a part of their product, but they are presumably lower than the most favorable prices quoted to users.
2$k
The smaller companies quote the same list prices as the large ones, but in some cases, somewhat greater discounts.
For Sylvania Electric Pro
ducts, Incorporated,the maximum users* discount is 1*1 percent compared with 1*0 percent for the two largest companies, while the smaller companies quote as high as 1*2.5 percent.
The General Electric Company and the Westing
house Electric Corporation tolerate this price competition relying upon their more adequate distribution facilities, completeness of line, and engineering service on special lamps to make their contracts attractive to users.
It is said that the distributors’ discount is from 3 to 5 percent
better than the maximum users' discount and varies with volume, perhaps reaching as much as 1*7 percent.
The discounts given above are related to
incandescent tungsten filament general lighting type lamps.
They vary for
different types, but within each type the competitive pattern is similar to that described above. The Government buys lamps on one-year Federal Supply Schedule term contracts technically awarded by the sealed bids procedure. ever, awards are made to all qualified bidders.
In fact, how
Electric lamps are one of
the few products for which bidding is restricted to firms whose products have been qualified by test before bidding.
Any manufacturer may have his
lamps tested for qualification to bid but must make the request six months in advance of the invitation to bid.
The National Bureau of Standards draws
samples from the manufacturer*s production and conducts the tests.
The pro
ducts of contractors are also tested periodically during the life of the contract to insure continued compliance with specifications.
Because many
state and city governments will accept bids only from those lamp manufac turers who are qualified to bid for Federal Government contracts, most manu facturers request the Government to test their lamps, even if they do not
255
bid for Federal Government contracts.
Only very occasionally does a pro
duct fail to pass the qualifying tests. The total purchases of lamps under such contracts during the period from September 1, 19li8 through August 31, 19ii.9 "were reported by contractors to amount to $7,llj5,000 for all kinds of lamps.
This is said to be approxi
mately 3 percent of the total lamp production of the largest manufacturer, the General Electric Company, and much larger percentages of the production of other companies.
Because of the default provisions of Government con
tracts, together with the possibility of work stoppages because of strikes or for other reasons, no one company is anxious to be committed for all the business.
It is said that the two large companies, although their contracts
are not limited as to the quantity they will deliver, would be unwilling to bid for unlimited amounts of business if single awards were to be made. On the invitation to bid issued in June 1950, 11 bidders responded. One bidder failed to submit lamps for qualification tests and one submitted lamps which failed to meet the test requirements; contracts.
the remaining 9 were awarded
All bidders, with the exception of the General Electric Cohh
pany and the Westinghouse Electric Corporation, were unwilling to commit themselves to accept more than a stated maximum amount of business per year.
Furthermore, none of the companies, aside from the two leaders, are
able to quote on all of the ^00 kinds and sizes of lamps listed for common Government use.
Awards are made to the smaller companies to take advantage
of the lower prices they offer and to the larger companies both to insure adequate supplies of lamps and to take advantage of the engineering service which they are in a position to offer on the many hundreds of kinds of special application lamps the Government requires.
256
The conditions of the contracts call for prices which include the cost of delivery of any quantity of lamps to, any point in the United States# They also require contractors to furnish to the Government 3>000 copies of a price list which includes item descriptions of the lamps they contract to furnish.
These are distributed to the Government agencies which purchase
lamps under the contracts. The discounts quoted to the Government are the maximum offered in the standard list and discount schedules of the firms to contract users.
For
the ordinary tungsten filament lamps for general lighting purposes these are UO percent for the General Electric Company and the Westinghouse Electric Corporation, 111 percent for Sylvania Electric Products, Incorporated, bZ percent for Kenrad, which is a subsidiary of Westinghouse, and 1)2.5 percent for the Champion Lamp Works of the Consolidated Electric Lamp Company.
All
these are the published discounts for contract users whose yearly dollar volume of purchases at net prices totals $200,000 or more* The purchasing policy of the Government, while it has not induced sel lers to depart from their established price policies, has brought to all agencies the advantage of the maximum contract users’ discount.
If agencies
contracted separately for lamps, only the Department of Defense could obtain the maximum discount;
others, according to estimates made by the Federal
Supply Service, would receive on the average a 35 percent discount.
The
centralization of purchasing and the consequent use of single contracts for all agencies extend the maximum discount to all.
In the year ending
August 31, 19li9 the non-military agencies purchased $3>929,750-worth of lamps, which was 55 percent of the total of $7,1^5>000.
This is equivalent
to $6,51#j583 list which at 35 percent discount would bring the cost, if purchases were made separately by the agencies, to $U,257>22Centralized
#7
contracting in this case resulted in a saving to the Government of &327,U79« Attempts have been made repeatedly to induce manufacturers to quote better prices for Government contracts, but none have been successful.
Plans
to purchase lamps for definite large-quantity deliveries and distribute them through supply centers have been explored, but the manufacturers claim that this "would not change the Government’s status as a user and in any event •would not reduce costs to the manufacturers who must maintain local stocks to supply other customers.
Kenrad, wholly owned by Westinghouse, at times
quotes local governments a larger discount than it offers to the Federal Government.
Attempts to persuade Westinghouse to permit Kenrad to quote
equally favorable discounts to the Federal Government have failed. The costs of selling to the Government in this case are no less than of selling to private users.
Inasmuch as most lamp manufacturers have
received contracts they must compete for each order placed by the using agencies.
Tn fact, the selling costs under the present scheme of central
ized contracting and multiple awards are in some cases higher than if the agencies purchased separately because many would buy under yearly contracts with single manufacturers.
The necessity for multiple awards in this way
eliminates one of the advantages of the sealed bids procedure which normal ly requires single awards to be made to the low bidder. b.
Automobile Tires and Tubes The markets for tires and tubes are similar in many respects to those
for electric lamps, but the Government's attempts to induce sellers to de part from established policies have been more successful in the case of tires and tubes. The tire and tube industry is composed of three types of companies:
25>8
the major companies, such as the Goodyear Tire and Rubber Company, the B.F. Goodrich Company, the United States Rubber Company, and the Firestone Tire and Rubber Company which dominate the industry in production volume and distribute tires nationally through factory outlets and authorized dealersj
the smaller companies with national distribution;
and the smaller
companies which manufacture for regional distribution. Tires are products which can easily be varied in quality by substitu tion of different compounds of ingredients such as new, synthetic, and re claimed rubber, and carbon black, and by changes in the kind of cords used in building the carcasses.
Production equipment is specialized and requires
a relatively heavy investment of capital, but production techniques are known by all companies and any company regardless of size— if it is adequately tooled— is able to produce a high quality tire. The quality of tires has improved a great deal in the past 30 years, but at any given time the quality of competitively priced tires of different manufacturers varies considerably as does the quality of the brands of any one producer and of different sizes within the same brand of the same manu-
1/ facturer.
Competitive products are, therefore, substantially differentiated
l/ See data presented in Chapter V, Tables 11 and 13. materially even though they are dimensionally and functionally interchange able in use. Adequate laboratory tests for measuring the expected life of tires have not been developed and the only certain method of measuring tire life is by controlled tests in use.
Federal Specifications are composed of re
quirements which can insure the purchase of a tire which will give good service, but cannot be used to measure tire life with sufficient precision
2$9
to evaluate it in making awards of contracts.
The specifications call for
qualification tests as a requirement for bidding, but this serves only to eliminate bids from manufacturers who are not capable of making a satis factory tire. Tires are sold according to price lines, and the highest quality tires of manufacturers, which are those purchased by the Government, are identified by the term "first line" tires.
This is really not objective measure of
quality but only an identification of the brand each manufacturer considers to be competitive in quality at the price line.
The tire industry quotes
prices to users and dealers which reflect price advantages in the following sequence:
retail, contract dealer, national account, large dealer, state
government, and original equipment manufacturer. The Government has bought tires for years on Federal Supply Schedule term contracts usually covering purchases of tires for six months’ periods. Until 1938 these contracts were let by the sealed bids procedure.
Bids of
manufacturers have never reflected active price competition for contracts and previous to 1938 appeared to result from collusive action to eliminate price competition. In the response to the invitation to bid for contracts to cover the six months’ period beginning October 1, 1937 the bids of U 4. different com panies with main offices in 6 states were identical to the cent for all but 15 items of the 129 for which prices were quoted.
In these 1$ instances
one company was responsible for 13 of the different prices and in lit of them the prices were higher than the remaining identical bids.
The pur
chasing officials understood from trade sources that tire companies filed prices, at which they proposed to sell to dealers and other users including the Government, with a trade association, the implication being that this
260
device was used to effect identical bids to the Government.
The same situa
tion had existed for the bids of previous years and in this instance the
1/ Government decided to take remedial action. 1/ Government Purchasing— An Economic Commentary, T.N.E.C. Monograph No 19, Government Printing Office, Washington, D.C., 19U0, pp. 37— 38. All bids were rejected and invitations reissued.
When the second set
of bids turned out to be a precise duplicate of the first, the Secretary of the Treasury formally asked the Attorney General if under these condi tions all bids could be rejected and contract negotiated.
The opinion of
the Attorney General was that the evidence of bidding warranted the conclusion that the bids were prima facie the result of collusive action and of a com bination in restraint of trade and that, therefore, the bids could be re jected and negotiation resorted to.
The Attorney General also suggested
that the Secretary of the Treasury might find it advisable to refer the mat ter to the Department of Justice for possible proceedings under the anti-
y
trust laws.
2/ 39 Op.
Attny Gen. 93.
The bids were then rejected and a contract was negotiated with the Sears Roebuck and Company at lower prices than those which had been offered by the tire manufacturers.
This action, together with the implied possibility
of anti-trust action by the Department of Justice, was effective in inducing the tire companies to change their policy.
On subsequent invitations bids
were not identical and offered tires at lower prices than previously quoted
261
1/ by manufacturersSince that tine the Government has been able to buy 1/ T.N.E.C. op. cit. pp. 37— 38. tires at prices which are the same as those paid
by all
but
the largest
original equipment manufacturers. At present the Federal Supply Schedule contracts are required to be used by all Executive departments and agencies of the Government, and the prices cover delivery to any point in the United or more tires.
Statesfor
orders oftwo
Contracts for the six months’ period beginning July 1, 19%0
were in effect with 26 companies.
Many of these companies were equipped
to
furnish only certain kinds and sizes of tires and tubes; 8 would deliver
to
any point in the United States including Alaska, 13 would
deliverto any
point in the Continental United States, while 6 would deliver only into specified zones within the United States* Contracts are not let by the
sealed bids procedure butby negotiation.
Proposals are solicited from all manufacturers and the resulting bids are tabulated.
Bids, as they are received, are not identical but those from
the major companies cluster around one price, with the bids of some smaller companies ranging into lower prices.
After the bids are tabulated target
prices are decided upon and bidders whose prices are higher than these are called in an. given the opportunity to lower their prices to one of the target levels.
The highest of these levels is established at the lowest bid offered
by a major company for each item. As a result of the negotiation the major companies, together with many of the smaller ones, sign contracts at the same level of prices, with some of the smaller ones signing at the lower prices they bid or down to which they have adjusted.
For example, in the schedule for six months beginning
July 1, 1950 16 companies offer the 6•00x16 tire at $8.99, 2 at $8.93, 1 at $8.82, and 1 at $8.29.
A comparison of Government contract prices -with
those offered to other classes of purchasers is shown below (Table 38). TABLE 38 Comparison of Government Contract Prices for Tires and Tubes with Prices offered to Other Classes of Trade Contracts for March 1, 19^9 through August 31, 19ll9
Kind of tire or tube
Government contract price
Price in dollars Special National state account price price
Retaxi price
6.00x16 U-ply passenger car tire tube
8.£L 1.52
8.62 1.60
10.01 1.80
1U.75 2.65
6.50x16 l|-ply passenger car tire tube
9.85 1.8^
10.61 1.85
12.32 2.07
18.15 3.05
7.00x20 10-ply truck tire tube
26.3h 2.25
27.32 2.76
32.92 3.80
lj.8.50 5.6o
7.£0x20 10-ply truck tire tube
30.85 3.12
32.1|2 3.20
39.06 U.iil
57.55 6.50
8.2^x20 10-ply truck tire tube
3^.10 3.35
36.03 3.77
te.iio 5.19
63.95 7.65
Large fleet owners typically buy at the national account price.
It is believed
that the Government pays prices which are lower than those paid by any user and that only the larger original equipment manufacturers are able to buy at more favorable prices. The sequel to the decision that the bids of the tire companies in 1937 were collusive is of interest because it led to a verdict by the courts that the Government cannot collect damages suffered from payment of high prices
resulting from collusion in violation of the Sherman Act.
In 1939 the De
partment of Justice brought action against 18 identical bidders for Govern ment tire contracts to recover treble damages, exceeding $1,000,00(1 result ing from the high prices paid by the Government for tires.
The decision of
the case turned on the point of whether or not the Government was a "person"
1/ within the meaning of the Act.
The district court before which the case
l/ Section 7 of the Sherman Act provides that:
’’Any person
who shall be injured by reason of anything forbidden or de clared to be unlawful by this act, may sue therefor..., with out respect to the amount in controversy, and shall recover threefold the damages by him sustained, and the costs of suit, including a reasonable attorney's fee."
In section 8 the word
"person" is defined "...to include corporations and associa tions existing under or authorized by the laws of either the United States, the laws of any of the Territories, the laws of any State, or the laws of any foreign country." was argued decided that the Federal Government was not a "person" within the meaning of the law and this opinion was upheld by the Circuit Court of 2/ Appeals and by the Supreme Court. Therefore, as matters stand, the Govern2/ T.N.E.C. op. cit. pp. 101— 102.
ment cannot sue for damages under the Sherman Act.
In 19^9 the Attorney
General recommended to a congressional committee studying monopoly power that the law should be amended to permit the Government to sue for treble damages, just as a private purchaser can, but no action has been taken to
1/ amend the lair. l/ Testimony of Attorney General Clark in the Hearings, Sub committee on Study of Monopoly Power of the Committee on the Judiciary, H.R., 8lst Cong., 1st Sess., Serial No lli, Part 1, pp. 86— 87. c.
Cement At present, prices offered for cement contracts reflect apparently
competitive bidding and in view of this cement could have been discussed in Chapter VII.
It is included here because prices bid for cement con
tracts were remarkably uniform before the basing point system of pricing was outlawed by the Supreme Court decision in 19i|.8 and the attempts made by the Government to obtain competition are of particular interest for the present discussion. As in the case of tires and tubes, identical bids reflecting uniform prices of sellers have been an acute problem in the Government's purchases of cement.
The products of sellers are generally considered homogeneous
by buyers of cement and purchases are characteristically made on the basis of nationally standardized specifications.
This establishes a definite
basis for price competition uncomplicated by differences in the physical product, and doubtless has been a contributing factor in the decisions of sellers to adopt uniform pricing systems.
In any event, prices quoted to
the Government commonly were identical for all bidders, in some cases to the 2/ sixth decimal place in the dollar prices quoted. 2/ The detailed evidence on identical bids for Government cement contracts is voluminous and well known so it is not reproduced here.
Tabulations of many bids for state and
Federal Government contracts, both before and after the basing point system was ruled to be illegal, are given in the Hearings, Select Committee on Small Business, H.R. 8lst Cong*, 1st Sess., June 28 through July 5, 19h9The extent of identical bidding is indicated by the fact that during the period from July 1, 1937 to May 1, 1939, for which data are available, two or more identical low bids occured in the bidding for 910 Federal Govern ment cement contracts. tied.
For 351 contracts bids other than the low bids were
This number of contracts was not related to the total contracts let
for cement during the period, but all the procuring agencies reported that the practice of submitting identical low bids was either invariable or com-
1/ mon. 1/ Reported in Government Purchasing— An Economic Commentary, op. cit* p. 33.
The Government was of the opinion that the prices were not only uni-
27 form, but were unnecessarily high
and in effect this was admitted by
2/ See for example, testimony of Secretary of Interior Ickes in Hearings before the Committee on Interstate Commerce, 7l|th Cong. 2nd Sess., on S. It05>5, p. 286. representatives of the industry who stated that the prices charged to the Government were often the same as those charged to small dealers in spite
3/ of the fact that the Government often bought in very large quantities. 3/ Testimony of Mr. B.F. Affleck, president of the Universal Atlas Cement Company, Ibid., p.
k7h*
The Government tried in many -ways to induce cement manufacturers to quote competitively for contracts.
A method often attempted was to reject
a.n bids and readvertise for new bids.
For some commodities sellers bid
competitively on the second invitation, but in the case of cement most fre quently the second set of bids was a replica of the first.
In any event
the process was time consuming and often impracticable because it could re sult in delays in the construction of needed projects. On various occasions the Reclamation Bureau of the Department of the Interior, which purchases the largest volume of cement of any Government agency, as well as other agencies, requested in invitations that bids be submitted f.o.b. mill instead of on a delivered basis. with limited successj
This attempt met
in some instances quotations were received on that
basis, but later, companies refused to quote any but delivered prices. On one occasion invitations for large cement contracts were the occasion for the entry of a competitor into the industry.
On May 1, 1939, bids were
invited on 5,800,000 barrels of cement for the construction of the Shasta Dam.
Delivery of the cement was scheduled in amounts of 290,000 barrels
per month for the first six months beginning with September of 19U1, and 200,000 barrels a month thereafter with deliveries to be completed in about two and a quarter years.
The successful bidder was to be required to post
a performance bond of $3,lt5l»000. 1
A group of men who had been active with companies which participated in the construction of the Boulder Dam and who were familiar with the price policies of cement companies, organized the Permanente Cement Company for the purpose of entering the cement manufacturing business. bid for the contracts and was low bidder.
This company
Although the company had pro
duced ho cement at the time, it posted the bond and was awarded the entire
267
contract.
This -was sufficient to enable the company to construct a plant
and enter the cement business.
Subsequently, however, the firm found that
its interests were the same as those of other manufacturers in the industry and the bids for Government contracts submitted by it were soon identical with those of competitive firms* Strong attempts were made to persuade the cement manufacturers to bid on an f.o.b* mill basis by the use of moral suasion.
In addition to public
statements made by Secretary Ickes on the subject, various high officials of the Government had tried to persuade the industry to abandon the use of the basing point system. the industry.
This included a request from President Roosevelt to
That the Presidents appeal caused a stirring in the industry
is testified to by a letter from the chairman of the marketing committee of the Cement Institute to another director of the Institute.
It read in part,
"If we were a generally well regarded industry, we might be justified in taking a stiff trading position on the President’s request.
However, we are
anything but popular, we have a very difficult position to maneuver out of; and we should not gamble unnecessarily, running as we do the risk of a blast from the President's office that may be ruinous. Federal business is of no real importance;
is entirely practical to grant;
can, and I think will, be forced out of us. have been to give in without any trading.
The f.o.b* mill price on
Therefore, good trading would
Now, when it comes to the larger
question of mill price on commercial business, much as I would like to think otherwise, I am convinced that we will have to maintain our basing point
2/
position and refuse the President's request..."
1/ Reproduced in Hearings, Select Committee on Small Business, op. cit* pp. 301— 302.
266
The industry, however, ignored the attempts at moral suasion and continued to quote to the Government delivered prices figured by the basing point system. In the tire and tube industry the implied threat of court action conn bined with the fact that one seller was found who was willing to quote prices lower than those which firms generally quoted, was sufficient to cause the industry to revise its price policy.
The basic conditions of
the cement market as compared with those for tires in some respects favored the Government's chances of obtaining competition:
there was a fair number
of producers of a homogeneous product who were in a position to bid for each contract, the Government's demand was sufficiently large on individual con tracts to offer an incentive to bid competitively, the quantities demanded were not so large as to prohibit the use of single awards to low bidders, and the nature of the demand was such that definite large-quantity deliveries to specified locations were possible.
The cement industry, however, is
characterized by high overhead costs, a high proportion of transportation costs in the total delivered price, and widely scattered demand and produc tion.
The temptation to cut prices is, therefore, strong and the low prices
feared from active price competition loom as a distinct possibility if uni form price policies are not observed.
The fear that abandoning the basing
point system in quoting to the Government would lead to a general breakdown of uniform pricing policy in the industry was apparently sufficient to prevent any measures, short of successful court action, from causing the industry to change the common price policy.
d.
Steel Office Furniture Markets for sectional steel furniture and steel office desks differ
269
from the markets for other types of furniture and steel filing cabinets discussed in Chapter IX in that sellers are few and adhere to price policies which are sufficiently uniform to eliminate active direct price competition for Government contracts. Sectional steel furniture consists of various types of standardized sections:
letter-size files, document files, card index files, shallow
drawers for documents and forms, compartments for books and stationery, and other units.
These can be assembled in many compact combinations to
fit the needs of a particular office.
An active interest in obtaining this
type of equipment was shown by certain members of the General Supply Com mittee in the early 1920's and the designs were subsequently developed by the Globe Wernicke Company working with these Government officials.
Today
only one manufacturer, the Globe Wernicke Company, is equipped to supply a complete line of sectional steel office furniture.
The entry of additional
firms into the markets is obstructed by the heavy investment required. The Government's purchases of the 82 sectional items which compose this line of furniture totalled about $160,000 for the year ending April 30, 19£>0, and some unknown amount of sales is made to other users.
The
Government buys by the sealed bids method, but will consider only bids which include offers for the entire line.
Thus the Globe’Wernicke Com
pany is the only bidder. The investment required in tooling is believed to be far in excess of the yearly purchases by the Government.
Hi view of this fact and the
uncertainty of being the low bidder, other firms are not attracted by the Government business alone.
The total demand apparently is also insuffici
ent to encourage the entry of additional firms at the prices established for the product by the Globe Wernicke Company.
Prices are limited by the prices
270
of other kinds of office furniture which are not sectional, and the limited and elastic demand appears to permit the Globe Wernicke Company to retain a monopoly of the market. The company sells to the Government at prices which are equivalent to its prices to dealers.
Inasmuch as there are no other suppliers, the only
alternative the Government has to accepting the prices is to reject the bids and purchase other kinds of furniture.
The Government considers the prices
in relation to the utility of sectional furniture to be reasonable compared with the same ratio for substitute products. The market for steel desks presents the Government with problems similar in some respects to those for steel files.
Desks made for general
sale to private users are sold at list prices which vary somewhat for dif ferent manufacturers, but the dealers’ discounts also vary and the net prices to dealers are approximately the same throughout the market.
Com
petition for sales takes the form of product differentiation and in recent years the practice of periodic model changes has become important with the changes consisting of superficial differences in appearance. The Government buys a Government specification desk.
Differences in
design and color of the standard desks of the industry make them unsuitable for Government use, but a more important reason for specifying a nonstandard desk is that the commercial desks are not considered by the Government to be sufficiently durable to yield the maximum wear per dollar of purchase price. In comparison with steel filing cases, however, the investment for tools and production line equipment to manufacture desks is substantially greater. As a result only a few manufacturers produce the Federal Specification desk.
The dominant firm in the Government market is the General Fireproof-
271
ing Company which is also a dominant factor in the non-Govemment market.
The development of the post war market for Federal Specification desks took the same form as for steel filing cases.
It was known that agencies
were paying very high prices locally for desks and often were able to buy only the ’'streamlined” models which were not so durable as the specification desk.
The Government attempted to interest airplane and other war materiel
manufacturers, who were facing conversion to the manufacture of civilian products, in bidding on Government specification desks, but none of them were attracted by the possibilities of entering the steel office furniture business.
In 19^8, however, the General Fireproofing Company agreed to
quote for Government contracts for limited quantities of desks.
The Govern
ment then used the same technique as it applied in procuring filing cabinets. The Federal Supply Service issued an order that all requisitions for desks be sent to Washington for centralized purchasing. For the first contract under this arrangement let in August 19-U8 the only bidder was the General Fireproofing Companyj
for the second contract
in April 19U? the Security Steel Equipment Company also bid, but the bid . was high and the Government was unwilling to award a contract at that price. Both the companies, however, were awarded contracts on the following three invitations (Table 39).
On one of these invitations three additional firms
bid, but their offers were about 60 percent higher than the price of the General Fireproofing Company and this apparently discouraged them from bid ding on subsequent contracts.
In the Slimmer of 1950 the Art Metal Construc
tion Company also bid, but received no contract because its quotation was considered to be high.
These bids give the appearance of price competition,
but are very close to dealers' net prices.
The Government was still in the
position in the Summer of 1950 of buying at prices set by the price policies
271
ing Company which is also a dominant factor in the non-Govemment market.
The development of the post war market for Federal Specification desks took the same form as for steel filing cases.
It was known that agencies
were paying very high prices locally for desks and often were able to buy only the "streamlined” models which were not so durable as the specification desk.
The Government attempted to interest airplane and other war materiel
manufacturers, who were facing conversion to the manufacture of civilian products, in bidding on Government specification desks, but none of them were attracted by the possibilities of entering the steel office furniture business.
In 1914-8, however, the General Fireproofing Company agreed to
quote for Government contracts for limited quantities of desks.
The Govern
ment then used the same technique as it applied in procuring filing cabinets. The Federal Supply Service issued an order that all requisitions for desks be sent to Washington for centralized purchasing. For the first contract under this arrangement let in August I 9I48 the only bidder was the General Fireproofing Company;
for the second contract
in April 19h9 the Security Steel Equipment Company also bid, but the bid . was high and the Government was unwilling to award a contract at that price. Both the companies, however, were awarded contracts on the following three invitations (Table 39).
On one of these invitations three additional firms
bid, but their offers were about 60 percent higher than the price of the General Fireproofing Company and this apparently discouraged them from bid ding on subsequent contracts.
In the Summer of 1930 the Art Metal Construc
tion Company also bid, but received no contract because its quotation was considered to be high.
These bids give the appearance of price competition,
but are very close to dealers' net prices.
The Government was still in the
position in the Summer of 1930 of buying at prices set by the price policies
TABLE 39
y
Bidders* Prices for Steel Office Desks Contracts Term Contracts for Indefinite Quantities and Indefinite Deliveries 191+8— 1950 y (Prices per desk, f.o.b* shipping point. Prices of bidders awarded contracts are circled)
Bidders
The General Fire proofing Co. Security Steel Equipment Co.
TJ-'W through 2-9-1+9
Term of contract -Biy-Trr" 1^5(5 . " T s e s t r through through through through 6 30-50 12-31-50 7-19-1+9 12-31-1*9
(62Z 5)
(£U 0^
(§iIo§)
72.30
(607 ^
€51)
Kanrickjon, inc.
106.00
National Office Furniture Co.
100.00
Penny and Gordon
100.00
Art Metal Construction Co.
(65^0^)
69.30
1/ Sourcer Based on data in the contract files of the Federal Supply Service, Washington, D.C. 2/ Desks, office, steel, flat top, 30g inches high, 60 inches long, 3U inches wide, double pedestal. Item No 26-D-2205.
y
f*o*b. shipping point prices not quoted. destination prices.
Estimated from f.o.b*
1/ of sellers for the market as a whole.
The fact that it buys in far larger
1/ As in the case of filing cabinets some large-quantity buyers, aside from the Government, purchase the Government specification desks. quantities than any other purchaser has not induced manufacturers to bid in active direct competition for Government contracts.
This appears to result
from the fact that the few suppliers in the market find it advantageous to follow uniform policies.
The shortage of steel relative to the demand for
products made of steel has been offered as an explanation of the lack of direct competition, but this does not deter more active competition in the market for filing cabinets which also require steel of similar qualities. The fact that the heavy investment deters the entry of additional firms leaves the few firms in the market, two or three in the case of desks com pared with half a dozen in the case of steel filing cabinets, undisturbed in pursuing their established price policies. 2.
Markets Where Product Differentiation Makes Sealed Bids Ineffective
a.
Business Machines and Scientific Equipment Business machines and scientific equipment are materially differen
tiated for the Government’s use in three ways:
(l) by their different
suitability for performing particular kinds of operations, (2) by their different suitability for the acquired skills of particular operators, and (3) by their different suitability for satisfying the personal preferences of particular operators which is only psychologically related to the first two kinds of differences. The differences in the ability of machines to perform different kinds
27k
of operations are obvious*
Simple calculating machines and bookkeeping
machines both can be used to perform arithmetical calculations, but the former cannot be used to write them on accounting forms.
Many machines
considered different in kind in this respect are substitutes to some degree for a given use.
Manufacturers, however, have successfully developed a
wide variety of specialized machines which justify their purchase costs because small savings in repetitive operations add up to large suras.
The
Government requires many different machines for this reason. Machines may be interchangeable with respect to their ability to per form given kinds of operations but be materially differentiated with respect to the training of particular operators.
Comptometers and Monroe calcula
ting machines both can be used for arithmetical calculations, but the use fulness of a Monroe calculator to an operator trained to use a Comptometer is very small compared with the usefulness of a Comptometer.
The competi
tion of substitute products in this case, however, is generally closer than competition between machines which perform different operations, and the price differences between them are likely to be smaller. Because of the differences in such machines with respect to operators’ efficiency, the Government finds it profitable to purchase the makes of machines which fit the skills of the operators.
In this case it has, at
least conceptually, the alternative of hiring employees trained to use the least costly machines, but the costs involved in such a personnel program would ordinarily far outweigh the gains which could be expected from buying the lowest-cost machines suitable for the operations.
Where machines are
significantly more efficient in performing operations, however, the Govern ment, like other employers, does hire operators on the basis of their spe cialized training.
Operators of many kinds of machines which are interchangeable with regard to the operations they will perform and the training required to use them have strong preferences for the machine of a particular manufacturer. This is especially pronounced in certain types of scientific equipment and typewriters.
Different makes of microscopes or typewriters may be identical
by any objective measurements of performance and may require practically insignificant adaptations of existing skills for operators to reach the same efficiency using the different makes, but still preferences may be very strong for one make.
Equally efficient scientists or stenographers insist
that different makes are the best. These preferences are sufficiently important to make the Government un willing to risk the possible loss of efficiency to gain the advantage of any possible price reduction which might follow grouping several makes and awarding contracts to the low bidder.
This decision is reinforced by the
fact that the cost per year of the machines is very small compared to the salary cost per year of the operator. In view of this high degree of material differentiation the Government buys business machines and scientific equipment on Federal Supply Schedule one-year term contracts awarded without direct price competition to all manu facturers whose products are demanded by Government employees. The only method the Government has for obtaining price concessions from suppliers is persuasion backed by the possibility of refusal to sign a contract under which the using agencies can order equipment from the sup-
1/ plier.
The Government argues that inasmuch as it uses large quantities
l/ A notice is included in the invitations to bid for office equipment contracts which reads as follows:
"Special Notice.
276
Bidders are advised that the acceptance or the rejection of the bids received will give consideration to possible benefits accruing by reason of making multiple awards.
When there is
no showing in a particular bid that the Government derives any benefit in price or otherwise by acceptance thereof, the right is reserved to make no contract with that particular bidder for the article involved.
Any information the bidder
may desire to submit in this respect should be attached to and made a part of his bid." of equipment and is willing to contract directly with the manufacturer it should be offered a lower price than a small-quantity purchaser pays when buying through dealers.
Many manufacturers sell to the Government at
some slight price concession, but many charge the Government the same price as any individual would pay if he walked into a store and purchased one machine.
The price concession may be a 10 or 20 percent discount from the
retail price which also may be offered by dealers to certain classes of buyers, or the concession may be the granting of a quantity discount di rectly on orders for any quantity which is normally rebated to largequantity users if their yearly purchases justify it.
In another case the
rentals of machines required for peak work loads are credited on the pur chase of new machines. On occasion the Government has refused to sign a contract with a supplier who would grant no concession.
In such cases, however, the Govern
ment finds it against its own interest to shut off purchases altogether, and must allow machines to be bought after the requisitioning agency certi fies that the purchase is necessary for efficiency and cannot be postponed.
m
For two years, on one occasion, no contract was signed with the Felt and Tar rant Manufacturing Company for Comptometers at the end of which the com pany agreed to credit rentals of machines required for peak work loads to the purchase of new machines.
It refused, however, to extend the 15 percent
discount applied to Government purchases by the Merchant Calculating Machine Company and the Friden Calculating Machine Company which supply the closest substitutes for the Comptometer. No method so far used by the Government has been successful in obtain ing prices for these types of equipment which could be expected from direct price competition for contracts. The market for typewriters presents the same problems of multiple awards in the face of manufacturers1 uniform price policies as do the markets for other business machines.
About thirty years ago the uniform
prices of manufacturers were considered to be unreasonably high, in view of the large-quantity purchases by the Government, and Congress placed a price ceiling of $70 on typewriters for Government purchase.
Although manufactur
ers repeatedly claimed they were losing money at the price of $70, they con tinued to sell to the Government even when this price was about $20 less than the price to educational institutions which receive the lowest price of any customer of the industry.
After the World War II, however, they re
fused to bid on Government invitations except at higher than the ceiling prices.
For a time no contracts were awarded and finally Congress was per
suaded to lift the ceiling. At the present time Federal agencies are authorized to pay no more for a typewriter than 90 percent of the price offered to the most favored cus tomer of the company.
The ’’most favored customer” is interpreted to mean
the most favored commercial customer which is any large commercial user.
a?8
The discount to such users is 19 percent off the retail list price and the Government *s price is 90 percent of that, or a discount of slightly over ,27 percent.
When the Government buys for instructional use in the public schools
of the District of Columbia and institutions of instruction of the Government, the standard educational institution discount of 33 l/3 percent is extended to it. b.
Repair Parts The buying of various repair parts illustrates the effect on prices of
a high degree of product differentiation in the form of inspection service and prompt delivery.
The purchase of automobile repair parts is a good
case in point. The cost of repair parts is typically small compared either with the investment in an automobile or the cost of inefficiency which can result from the vehicle's being out of service for any length of time.
Dimensional
interchangeability and durability are the important characteristics sought in buying parts. All the manufacturers of automobiles offer complete lines of repair parts for the yearly models still in use through their authorized distribu tors and dealers. of trade.
These are sold at list prices less discounts to classes
The maximum discount is to dealers with a smaller discount off
list for garages and repairmen who are not authorized dealers.
The Govern
ment negotiates term contracts with manufacturers under which agencies throughout the country can obtain parts from the nearest authorized dealers at prices which are substantially lower than those offered to garages and repairmen, but are 5 to 10 percent higher than the net prices to dealers. A large proportion of the repair parts is purchased by the automobile
279
manufacturers from independent parts manufacturers.
It would be possible
for the Government to buy directly from the parts manufacturers at prices much lower than present contract prices.
If it did so, however, the only
appropriate method of purchase would be through yearly contracts let to bid ders on qualified products lists with periodic checks on the quality of the manufacturers1 output.
Such a program would involve the costs of preparing
many specifications, of testing to qualify products, and of stocking thousands of parts in many locations throughout the country.
The question is whether
or not the saving through buying from primary sources in open competition would offset these expenses plus the risk of receiving poor quality parts which such a program would involve.
To date it has been judged to be ad
visable to pay "an extra layer of profit11, as the purchasing officials put it, which results from buying a highly differentiated product without direct competition, rather than incur the expenses and risks involved in the alter native program.
The possibility of direct purchase, however, must act as a
limiting factor in the price decisions of the present contractors. c.
Pharmaceutical Preparations Pharmaceuticals provide an interesting example of products which are
well defined by nationally accepted objective standards, those of the United States Pharmacopoeia, and yet are highly differentiated by the personal preferences of the doctors who prescribe their use.
The Government accepts
these preferences as material because it takes the position that the doctors who, in Government service as elsewhere, must accept personally the burden of the responsibility for the health of their patients, should be permitted to choose the pharmaceuticals necessary for their treatment of the patients. The manufacturers of pharmaceuticals, of course, differentiate their
280
products highly by advertised claims of superiority and spend a great deal of promotional effort to -win the loyalty of doctors.
The sales in the in
dustry are distributed among well over 100 firms and each of these has among its loyal customers physicians of equal competence and integrity who have faith that its products are better than those of its competitors.
At the
same time the Food and Drug Administration enforces a rigorous control over the quality of the pharmaceutical preparations to insure that they meet the standards of the United States Pharmacopoeia.
These standards in turn have
been developed by the most capable of the doctors and by medical research scientists to define products which are homogeneous from the viewpoint of their intended physiological therapeutic effect. In view of the fact that pharmaceuticals are considered to be substan tially materially differentiated, the Government buys them, without direct price competition on Federal Supply Schedule term contracts entered into with all bidders who are considered to be responsible.
As a result there
are 103 contractors from whom the requisitioning agencies may order pharma ceutical preparations.
All of them do not offer complete lines of the pro
ducts but all of the major manufacturers are included among the contractors. Contractors furnish Government agencies lists and descriptions of the products they offer for sale with net prices shown for each item.
Although
all contractors receive awards and there is no direct price competition for contracts, price reductions are obtained.
The published prices of different
manufacturers established for the general market vary considerably for com parable items.
In preparing their special price lists for distribution to
Government agencies the contractors adjust prices to bring them more near ly in line with the prices of rival firms.
This results in prices which
are estimated to be 13 percent below dealers' prices which the using agen-
281
cies would pay in most instances if they purchased individually. There is little doubt that the Government could procure pharmaceutical preparations at more.substantial price reductions than at present if it considered the differences between the products of manufacturers to be im material.
A measure of the possibility is available for aspirin.
2h Chapter
VIII, Table 27 it is shown that the Government pays upwards of 21+ cents for a 100-tablet bottle of aspirin in small quantities on the term contracts for pharmaceuticals while it pays 8 cents when it purchases the same item in large quantities for distribution through Federal Supply Centers.
The
difference between the present prices paid and those which could be obtained by consolidating requirements and purchasing large quantities from low bid ders might not be so pronounced in the case of all pharmaceuticals, but it would doubtless be substantial.
d.
Cigarettes and Tobacco Like scientists for their instruments, stenographers for their type
writers, and doctors for their drugs, smokers have strong preferences for particular brands of cigarettes.
These are considered material by the Govern
ment and the same technique for purchasing them is used as with the products discussed above, and with the same results in purchase prices.
The prices
are uniform and stable and the Government, ordering in minimum quantities of from 10 to 60 cartons depending on the brand, pays identical prices of slightly over 11+ cents a package for 11 brands including all the most popular ones.
This is the price including Federal tax.
Provisions are also made
in the contracts for the purchase of tax free cigarettes by agencies which are entitled to buy them.
The advantages of the contract result from the
savings in administrative costs of contracting, not from price reductions
282
through centralized purchasing. C.
The Effect of the Government1s Purchasing Policy As only those markets in which the sealed bids device is ineffective
are discussed in this chapter, the questions to be answered in judging the effectiveness of the Government's purchasing policy are (l) whether or not any alternative device would be effective, and (2) how effective other measures, aside from the use of sealed bids, are in bringing favorable prices to the Government.
The answers to these questions will differ for
the two types of markets discussed here0 1.
Markets Where Sellers' Price Policies Make Sealed Bids Ineffective In the markets where price policies of sellers alone make the sealed
bids device ineffective, sellers adhere to their policies very strongly and in most cases it is doubtful whether any buying device would offer them enough incentive to cause departures. a.
Comparison with Limited Competitive Bids The open bidding feature of sealed bids is ineffective and any limita
tion of bidders could not be expected to be effective.
The use of specifi
cations does not cause sellers to bid competitively and the use of accept able products lists and brand names, which assumes that products are not directly competitive, certainly would be expected to reinforce rather than weaken decisions to adhere to established policies.
Award to the single
low bidder is not effective and the contrasting policy of award, which con siders continuity of supply, would tend to support stable or uniform prices when sales are low relative to capacity.
When sales are high relative to
capacity and sellers quote individual prices to different buyers, the policy
283
of continuity of supply brings more favorable prices than the sealed bids method of award to the low bidder, but when sellers price uniformly for all buyers in the market andadhere to
policies of stable prices, they would
be expected to quote the same prices regardless of the buying device used. Differences in the operation of the two devices might well be expected, how ever, if these policies are considered in the light of whether or not bid ders* prices are made available to competitors and the public. Public availability of bidders* prices in markets characterized by stable or uniform pricesis likely
to raise prices to buyers.
Individual
bidders may find it profitable to deviate from established policies if they have assurance that their competitors will not know they have done so.
This
may follow solely from the desire not to prompt competitors to cut prices, or from the fear of disciplinary action by dominant companies.
Sellers also
may fear that knowledge of price concessions to particular buyers might lead other buyers to believe they were being discriminated against and initi ate proceedings under the Robinson-Patman Act. In the opinion of the editors of the National Association of Purchasing Agents Handbook, public availability of bidders' prices would prevent private buyers from obtaining price concessions which could be expected if they kept 1/ the information confidential. The fact that the Government makes such 1/ See Chapter VI, p. 15>3.
information public would in all probability have no such effect on prices in industries where sellers calculate prices individually for each contract and buyers accept the idea that prices quoted to the Government do not es tablish a precedent for the prices at which they buy.
In the markets con
sidered here, however, sellers quote prices established for the market as
a whole, and could be expected to dislike having concessions made known* Some direct evidence of the effect of this policy in raising prices to the Government was given by officials of steel companies before a con gressional committee.
The President of the Continental Steel Company testi
fied that in bidding to the Government his company quoted published prices, but that these were only the starting point for negotiation with many private buyers.
When asked for an explanation for not using the same policy when
selling to the Government as when selling to private buyers, he said, ’•Well, you ought to buy like some of the other buyers..* You should not advertise
1/ your price.1’ The President of the Bethlehem Steel Corporation testified
1/ Hearings on S.
To Prevent Uniform Delivered Prices,
Senate Committee on Interstate Commerce, 7^th Congo, 2nd Sess., 1936, p. 67. that his company pursued the same policy when selling to the Government, 2/ apparently for the same reason.
2/ Verbatim Record of the Proceedings of the U.S. Temporary Economic Committee, Vol. IX (Steel Industry), October 26 to December 8, 1939, p. 10596.
The public availability of bidders' prices could have, in contrast, the effect of encouraging sellers to depart from established prices when such prices are a reflection of agreements which could be interpreted as being in restraint of trade.
If sellers feared that the general knowledge
of their pricing practices would lead to action under the anti-trust laws they might in some instances prefer to abandon them.
In most cases, how
ever, the existence of stable or uniform prices is well known and only
285
deviations from such prices would be revealed by disclosing bidders' prices. For the Government keeping prices confidential is not a practicable alternative to making them public.
The nature of Government budgeting and
accounting requires that contract prices resulting from centralized purchasing be known by hundreds and sometimes thousands of individuals.
An indication
of the extent to which price information must be diffused is given by the fact that 3,000 copies of suppliers' price lists are required to inform the ordering agencies throughout the country of prices under Federal Supply Schedule contracts which are mandatory for use by all agencies of the Ex ecutive branch of the Government.
Also, the public nature of Government
contracting prevents keeping prices confidential except where for security reasons this is necessary.
Suppliers who are dissatisfied with awards could
be expected to complain either to the General Accounting Office or to their congressmen or both, and the result would be interminable investigations and justifications of awards.
On political grounds alone a policy of with
holding information on bids and awards would be unworkable. b.
Negotiation Negotiation based on arguments that selling to the Government directly
rather than through wholesalers justifies manufacturers' quoting the same price to the Government as they do to wholesalers is often an effective method of reducing prices, especially where it is backed by the possibility of refusing to award contracts to sellers who offer no price concessions. This is possible only in cases where demand is postponable for sufficiently long periods of time to make the loss of business induce firms to sell di rectly at a price concession, or where substitute products can be used for a time without too great a loss in efficiency.
Such negotiation has been
used with good effect in buying many types of office equipment, steel desks, and steel filing cabinets.
The possibility of purchasing substitute products
must also be a strong factor in granting the Government a favorable trade status in the scheme of discounts for many other commodities, such as pharma ceutical preparations and repair parts. c.
Anti-trust Actions "Where collusive agreements are at the root of policies of stable or
uniform prices, action under the anti-trust laws and the statute making conspiracy to defraud the Government an offense has been effective in re ducing prices to the Government in a few important cases. It was noted above in the discussion of automobile tires and tubes that the Federal Government cannot sue for damages under the Sherman Act. Similarly it cannot take action against sellers under the Robinson-Patman Act if there is evidence that sellers are quoting discriminatory high prices to the Government, because the Act has been interpreted by the Attorney General as not applying to Federal Government purchases. interpretation has been accepted by the Federal Trade Commission. l/ 3§ Op. Atty. Gen. $39-
This
1/
Direct
The Attorney General reasoned that
the Act merely amends the Clayton Act which has not been regarded as applicable to Government contracts.
He further stated that
if the amended statute did apply, lower prices to the Government in all likelihood would not violate the law as they probably reflect lower estimated costs of doing business with the Govern ment because of quantity purchases, the absence of credit, risk, solicitation expense, etc.
The Attorney General gave his opinion
in answer to the question of whether or not under the law a seller
287
could discriminate in favor of the Government, but if the law is inapplicable in such cases it is also inapplicable in cases where sellers quote higher prices to the Federal Govern ment than to private and other government buyers# suits for damages under the anti-trust laws, such as were effective in reducing tire prices to the Government, are not available as a method of combatting collusive bidding. The Government may, however, sue for damages under the statute con1/ cerning conspiracy to defraud the Government. Such suits have been used 1/ 18 U.S.C. 88
2/ successfully to prevent collusive bidding in a few instances. 2/ For example, see U.S. v. William F. Hess et al. U.S. Distr. Court for the Western District of Pennsylvania, No 101*62 criminal, Washington, 1939.
Such direct action is seldom a practicable measure for purchasing officers.
The evidence in the bids alone is insufficient to establish a
case or even to provide adequate indication that grounds exist for a suit# Each purchasing officer must buy many commodities and the impersonal nature of most Government contracting does not bring them in sufficiently intimate touch with an industry to obtain the additional information which is neces sary for such an action. Government buying, of course, is benefited along with private buying by successful anti-trust actions which cause sellers to abandon uniform pricing schemes and adopt more competitive pricing methods.
The coopera-
288
tion of Government purchasing officials has often been enlisted by congres sional committees, and on one occasion by the President, to obtain evidence of noncompetitive pricing practices for use in anti-trust actions or in formulating legislation.. At least three surveys of tie bidding have been made;
one covering about 8 months in 1936 when the President requested all
1/ procurement officers to report identical bids to the Department of Justice,
1/ T.N.E.C. Monograph No 19, op. cit., p. 113.
a second time when the Temporary National Economic Committee obtained a study of more than 25,000 exa 2 July 1, 1937 to May 1, 1939 T
les of identical bids covering a period from and a third time when the Small Business Com-
2/ Ibid., Appendix V.
mittee of the House of Representatives in 1950 received reports of identical bidding from all Government agencies.
While thesw have added to the store
of information regarding the practice of tie bidding to the Government, they have not resulted in specific actions of direct benefit to Government pur chasing.
It should be added, however, that such information has played a
part in important court proceedings, such as the Federal Trade Commission's basing point case, and in influencing the opinions of congressmen regarding anti-trust legislation. The Federal Property and Administrative Services Act of 19^9 directs the Administrator of General Services to report to the Attorney General for appropriate action any bids received after advertising which in his 3/ opinion evidence any violation of the anti-trust laws. In the year and
3/ 63 Stat. itOO, Sec. 302, (d).
28?
a half following the establishment of the General Services Administration, however, the Administrator had not found occasion to refer any bids to the Attorney General, 2.
Markets "Where Product Differentiation Makes Sealed Bids Ineffective The foregoing discussion applies particularly to markets where numbers
of sellers supply products which are considered homogeneous by the Govern ment, and, therefore, the failure to obtain competition is due principally to the price policies of the sellers.
All of the measures by which the
Government attempts to obtain more favorable prices in such markets are also applied in markets for highly differentiated products.
In these lat
ter cases, however, the price policies of sellers are strongly supported by the fact that their products are materially differentiated to a high degree. The Government has no way to obtain direct price competition because no com petitors exist who furnish a product sufficiently similar in quality to be considered homogeneous.
Competition of substitutes does, of course, limit
the level to which the prices of these differentiated products can rise. Of the measures discussed above the most successful is likely to be negotiation to influence manufacturers to sell to the Government at dealers* prices.
However, the argument that there are cost savings in doing business
with the Government does not apply.
The products are purchased on term con
tracts with all major competitors and each firm must incur the same sales costs to influence Government agencies to buy their product as to influence other buyers.
There is unlikely to be any basis for anti-trust actions.
The products are highly differentiated and the stable prices are usually different for products of different firms.
Bidding, therefore, does not
provide any direct indication of collusive price agreements, if they do exist.
290
An important barrier to direct price competition is the absence of competitive firms for the same product. The corrective is the entry of more firms into the market, and the bar to this is either patent protection or investment in relation to profitability of the business.
There is little
the Government can do to encourage the entry of new firms aside from the action it has already taken in consolidating demand and ordering in large quantities which may attract them. The discussion in the preceding paragraphs reveals that the Government faces many of its most difficult buying problems in these markets.
The
fact that the methods it is able to use are of limited effectiveness does not mean that it does not buy advantageously from the viewpoint of the tax payer.
Although its buying devices may be less effective in some markets
than the devices which private buyers may use, the operation of its in ternal purchasing policy results in substantial advantages.
These are dis
cussed in the following chapter r! ne per unit 2/ “ i-tollers)
I t«m deacrlp 11on
Percentage by »hlch r-tsll exceeds stores prices
Annualsalsa (units)
Valus of annual aalsa at atorsa Issue prices (dollars)
Valua of annual aalaa at tjploal ratal! prloaa (dollars)_____
Trlsollum, phosphate, 100-lb. contnlnor
con?
5,944
28,237
34,178
Paint, exterior, oil, shite, 1. c*tn
can
3,499
12,383
19,939
Turpen? Ino , .rum spirits, I-.*a I. cun
can
9, 669
10,636
14,504
Varnish, spar, water re-
c«n
6r ,
1 - .*»i 1 .
'• a n
52-A-400
Anx, floor, 11 pill, l-.-ai. cent.
con?
55-5-2110
Bunin, rubber. N o IB, l/8-lh. box
box
f>5-LUll5*£
Hlnvlers, 3-rlng, lmltrtlon leather, 11" * b £, stiff cover
each
-ilpfl,
box
S.'-C-IC544
Typical r«LRll price per unit 3' (dollars;
w ire,
"Jem p a t -
13,316
5,920 25,546
67,733
126,999
lose
r \ 4 60
34,479
box
34,48 9
81,911
tern, l‘o t h
«* 1 i - :« ,
"
x
103,383
1 >i "
1.' •,u is ‘ * , < 2, “04 ib-
r-i. -1 Is, .•'II/';• 11 «r ? ?
1)
b
,94 s
• 1.
1,010
■»ro :.in 1 ,*64
5,346
12,973
25,571
1/4” 123,262
i-v- ':i
48,278
Inc. wire V.. •-.1
•,
190,895
441 5. *, 1 2 5
a-, - I
\
.
.4-'
b«, 446
9f,>JV* :■« ’ 1n .7 11 « , fir-, an ! a •1 l, | M " . :' : * -C,l .
44 . 1
Vo*- r \
14 .B
1 a »!1, f ri 1
teh, 1 i’!ibs
•.1
30,743
19^,939
2*0
SO,568
44 ,"4f
52,508
4,246.886 ■ v - r i c | - v ' • 1 , 1 - t i r - • ■< 1 1 • r 1 e/. J
1/
'i_f
o ur • . T r- a 1
n
a r -
u I /I ♦ -
•h 1 '
I s s u e . H i-
Ja 1"
• ! fr 9 i - pr I
Act
t I t. 1 n v
i'll o f
1 t
cl--.
* r - p -1* •> p a l : y 1 - 1 1 'in
p - r u e
n * n -• .* r
I'u iitr'i'ti'
r!
b '- s
n'lrm;
" ; p l ! e 1 Vir!'n
jj/ T y i \ e * l
rotftM
prices
Aasti 1rig ton,
mu
t *tajl
p
r- q . r*
.
Tsii- prlc-^ are firm for Tso months' periods and
?.'p ilff-r-jj! 1?*t.s b-c’tus- il; eontr’t.'t prices differ and
n
' !'*r• b»
' y-.j •«r « ’
,v- V. 1 n •• i n .
'' va r o p - r n
>>n '
!• ' '"b
sfni’h lsHie prices e r- cofis tan t and l£) thr per-
f ' fi* •» tnl nl e tra* •ve roats of storing and Issuing. arc
prices
for
c o mp Hr i i n l e
Items
purchHSPvi I n s a s l l
quantities
298
M
TAPLt: >ed*r«l
C t c c k cu t -11 op I trm nuni! o r
r«rvlce
Ctorer issue Typical prl~e per retell unit 2/ price per ” unit 3/ (d o l ) (dollars)
I ’ em i e ? - r ! p. t t o n
b u tte ry ,
s ! :r
I
Stores Issue Prices to A^enclea Compared w i t h Retail Prices December 12, 1949 \J
Percentage by which retell exoeeda etorea prices
1 l*t**hl ' .-"it ,
Annual seles (units)
Valus of annual sales at stores Issue prices (dollars)
Valus of annual aalss at typical retail prloss (dollars)
40.0
731,906
43,914
73,190
, me ‘ I- rl nd
, Je.nk, swiii.'in*.' «rt i i ,
tu* o ,
!'o l . i r r '
!r,
• ) . 1 ! e , fi.' " M m .,
* bj ,
«.*»h o r ^'.rbit--**, a t «** 1 , 1
C h r tf'i 1 •• .
1
‘i t
1 * •, 1 —k.*► .1 .
C 1-V 687 orders placed during the
1/ same period by the Federal Supply Service.
The savings in price to be
1/ Chapter H , Table 5, P« expected from agency purchases would, because of these smaller quantities, be less than those obtained by the Federal Supply Service.
C.
Summary It is clear that the Government’s purchasing policy of centralizing
purchases and the policy which guides the noncentralized purchasing of the civilian agencies result in very substantial savings and increases in the utility received per dollar spent. The estimate of a 30 percent saving in purchase prices from central ized purchases made by the Federal Supply Service appears to be reasonable in light of the available facts. increase in utility-per-dollar.
This is equivalent to about a I43 percent The agencies pursue similar policies for
the 80 percent of the Government’s requirements which they purchase and they make similar savings although probably not so great in view of the average smaller contract quantities. No adequate quantitative measures are available for the savings which result from the research and specification programs which determine the choice of products to buy, but the scattered evidence and informed opinion lead to the conclusion that these are of greater quantitative importance to the Government than the savings resulting from lower prices. The administrative costs of centralized procurement are in large part offset by savings in administrative costs eliminated. It is very probable that the utility-per-dollar received by the Govern-
306
ment is doubled if the comparison is between present purchasing and non centralized purchasing by limited competitive bids and agency specifications.
Chapter XII Implications of Government Purchasing Policy for the Economy as a “Whole
A.
The Present Use and Possible Applications of Government Purchasing Policy Government purchasing policy is of interest for the study of markets
because it is a consistent and forceful plan devised to use the power wielded by a buyer to increase price competition among sellers to supply products rationally chosen to fill the buyer*s needs efficiently. The present use of these policies by the Federal Government and other buyers has very limited consequences for the economy as a whole.
The full
potential consequences of the policies depend on the degree to which it is possible to extend their use to purchases made by other buyers. lo
The Present Use of the Government *s Policy The Government purchases a larger volume of civilian types of goods
than any other buyer in the country.
It competes directly with other buyers
for the purchases made by the civilian agencies— l,3h5 million dollars* worth in 19k9— and for some large, but unknovm, amount of the 7,265 mil lion dollars* worth spent by the Department of Defense for items which are not specially designed for military use. For many items the Government must be the largest volume buyer in the markets, but if the products of each market are defined to include close substitutes, it does not buy a large percentage of the volume of goods pas sing through any one market.
For example, the Government's fleet of auto
motive vehicles of all types for the civilian agencies is about 80,000 with from 1^,000 to 20,000 new vehicles purchased each year, but although this is the largest fleet under single ownership in the country, the yearly pur-
308
1/ chases are a small fraction of 1 percent of the sales of automotive vehicles.
1/ Information provided by the Federal Supply Service, Washing ton, D.C.
The Government's fleet numbered 80,311 vehicles as
of June 30, 19^9. The volume of its purchases of most commodities enables the Government to influence sellers' policies, but it does not give it a dominant monopsonistic position in any market for civilian goods. Federal Government purchasing policies have been widely adopted by state and local government purchasing officials.
An idea of the quanti
tative importance of state and local government purchasing is given by the fact that during 1938
88 cities with populations greater than 30,000 pur
chased 138 million dollars* worth of goods.
The 88 cities were 28 percent
of all of those with populations over 30,000, but included all but one of 2/ the cities with populations of 500,000 or more. Most purchasing by state 2/ T.N.E.C., op. cit., Table V, pp. 17— 19. and local governments is conducted by the sealed bid method although in many instances variations are made in applying it. Many local governments, 3/ for example, follow tne policy of buying from local suppliers. State and 3/ Ibid., p. 20. local governments procure much the same type of goods as the Federal Govern ment does, and the effects of their buying must be similar to those of the Federal Government purchasing. The greatest influence of Federal Government policies on purchasing by other buyers is exerted by the use of Federal Specifications.
More than
309
2,000 Federal Specifications were in force during 1950 and during the year ending June 30, 1950
2,282,201 copies of individual specifications were
distributed by the General Services Administration and the Government Print ing Office to Government agencies. to March 1, 1951
During the 8 months from June 30, 1900
2,535,307 copies had been so distributed.
The great bulk
of these is issued by the agencies to contractors and prospective bidders for Government contracts let by both civilian and military agencies.
In
addition, very large quantities are sold by the Government Printing Office to the public. State and local governments make wide use of Federal Specifications in their buying.
The exact extent to which they are used is not known, but a
survey made of the specifications used by the City of Milwaukee shows that 35 percent of them were Federal Specifications.
It is believed that this
1/ is typical of the use by large cities.
Federal Specifications are used
1/ Information supplied by the Federal Supply Service, Washing ton, D.C. by many private buyers.
An indication of their wide use is given by the
fact that 31 percent of the purchasing agents who answered the questionnaire sent out by the National Association of Purchasing Agents reported that 2/ they used Federal Specifications to some extent in their buying. 2/ N.A.P .A. Handbook of Purchasing Policies and Procedures, Vol. I, 1939, p. 261. As a result of their vise by state and local governments and private bvyers, for some products the influence of Federal Specifications extends over the majority of the transactions in the markets.
For example, as a
310
result of forty years of testing and specification development for general lighting tungsten filament electric lamps, and a long program of qualifica tion testing, Federal Specifications now provide the quality basis for their production and sale throughout the industry.
The ability to organize pro
duction to manufacture lamps meeting Federal Specifications thus has become one deciding factor in the survival of existing firms and in the entry of any new firms into the market.
For other commodities the influence of Fed
eral Specifications is exerted only through the purchases of the Federal Government. The Government’s use of specifications may lead to changes in the pro duct which sellers supply to all buyers in the market.
The other features
of the buying policy, such as open bidding and award to low bidders, directly affect the price paid by the Government, but have little or no effect on the prices paid by other buyers of the same product* upon as being in a special category as a buyer;
The Government is looked in part because it often
purchases in larger quantities than other buyers, in part because product comparisons are difficult, in part because it makes awards of most contracts on price alone, and in part because the inapplicability of the RobinsonPatman Act permits sellers to discriminate both in favor of and against it. Its contract prices are public knowledge, but the available evidence of sel lers' and buyers' opinions indicates that private buyers do not look upon prices quoted to the Government as establishing precedents for quotations to them.
This is largely true also for the prices quoted to state and local
governments. Thus, Federal Government purchasing has little direct effect on the prices paid by other buyers, but the influence of its policies extends over a significant portion of state and local government purchasing and
311
through the use of Federal Specifications the influence of its product policy extends over some portion of the purchasing of private buyers as well. 2.
Possible Extension of the Use of the Government's Policy The great majority of the products procured by the Government are also
purchased by other buyers by brand names and limited competitive bids or personal shopping in all types of markets— primary, wholesale, and retail. They are purchased by all types of buyers ranging from those business firms whose yearly demand is very large down to individuals who purchase occasional ly in small quantities at retail.
Many of these buyers can apply economical
ly the Government's purchasing methods, but many others cannot because the cost and technical knowledge involved in the use of sealed bids and objec tive commodity specifications place the methods out of their reach. The purchase quantity which makes the use of sealed bids device economi cal is determined by the costs of applying it and the savings which result from its use.
This varies for different commodities.
In some instances
the cost of the use of specifications is controlling and in others the cost of the other features of the sealed bids device is controlling. The extension of the use of specifications is limited by two factors, (1) the fact that most retailers and wholesalers do not know whether or not the brands they sell meet the requirements of specifications, and (2) the added cost to buyers of selecting specifications and testing and inspecting the products delivered on contracts to determine whether or not they conform to the requirements. The fact that retailers and wholesalers do not know whether or not their brands of products conform to the requirements of specifications is only a temporary difficulty.
Manufacturers either know or can find out
312
if their brands meet specifications and can provide such information to ■wholesalers and retailers.
At present, the Government and other buyers are
usually able to buy from wholesalers, and at times retailers, on the basis of specifications, although an educational period during which the sellers equip themselves with necessary information may be necessary to establish the market. The quantity which must be purchased to make the use of specifications economical varies for each product and cannot be stated with certainty.
It
is of interest to note, however, that the experience of the Government has led to the decision that sealed bids and specifications shall be used for all purchases of $5>00 or greater value, and in fact are used for many smal ler value orders.
The use of specifications entails the costs of selecting
the appropriate one to be used from among the standard specifications avail able, and inspecting the products purchased to insure that they meet the requirements of the specification.
3h general, the use of specifications
would be economical for any organization which employs a purchasing agent. Such organizations would either have inspection facilities of their own or be in a position to retain independent laboratories to perform the necessary sampling and testing. This would limit the buyers who could adopt specifications in their purchasing to governmental, institutional, and business organizations of large and moderate sizes, but would exclude very small firms which do not employ a purchasing agent.
In addition to business firms which buy for
consumption and not for resale, those which purchase goods for resale under their private labels, such as mail order houses, department stores, chain stores, and many stationery, and other supply houses, could— and at times do— also use specifications.
Firms which purchase nationally advertised
313
or suppliers’ brands for resale would have no reason to use specifications in their buying. The use of the sealed bids device (aside from the inclusion of specifi cations) is much more expensive for the Government than it need be for private buyers.
The principal expense is in the duplication and mailing of invita
tions and the tabulation of bids.
Largely for political reasons the Govern
ment is unable to eliminate from its bidders lists the names of firms which have no prospect of being successful bidders.
Private buyers could limit
their lists to sources which might bid favorably and greatly reduce adminis trative costs of inviting bids.
In general, all buyers who use limited com
petitive bids could open their lists to all responsible and prospectively successful bidders without excessively increasing their costs of contracting. Many buyers, who purchase in quantities too small to attract sellers in primary and some intermediate wholesale markets, would find it economical to use sealed bids and specifications.
At any stage in the channel of dis
tribution some direct or indirect price competition may be obtained by re ducing otherwise differentiated products~to homogeneity.
These products
usually sell at different stable prices in wholesale and retail markets and the one selling at the lowest price may be selected by the buyers. in some such markets a degree of price competition exists.
However,
The effectiveness
of the sealed bids device and specifications, however, is determined in part by the degree to which standardization of demand and centralization of purchases within the firm increase order quantities.
This naturally is
limited by the firm’s total demand for the product over the period of time for which contracts may run, usually not more than a year. The total volume of production in each industry which would flow through the markets established by the widespread adoption by other buyers of the
3lU
Government’s policy is difficult to estimate with accuracy.
The present mar
kets in which specifications are used, those for homogeneous products, are substantial markets which are recognized as such by the trade.
The adoption
of the sealed bids procedure would leave them unchanged, but a more intensive application of internal purchasing policies might well increase the volume of sales flowing through them.
The present markets in which products are
considered differentiated are to a degree different for each product because of the successful immaterial and material differentiation.
In the cases
where the policy of using specifications reduces competitive substitutes to homogeneity, it can be assumed that the resulting markets would be sufficiently large to be recognized as independent markets commercially.
From the economic
viewpoint it can be assumed that they would be of sufficient size so that the volume of production sold by firms which are the sellers in the market would be sufficiently large to make it profitable for them to redesign pro ducts, reorganize productive factors, and adjust price policies in response to the shift in buyers’ policies. It can also be assumed that if all buyers who found it profitable to do so shifted their policies to those now practiced by the Government, very substantial markets would remain in existence in which the products are im materially and materially differentiated for sale to small-quantity buyers. Such markets now exist alongside markets in which the same physical com modities are sold on specifications as homogeneous products.
Paint, for
example, is sold on specification through industrial markets, while many of the same paint items are sold through wholesale and retail channels where they are differentiated by brand names and sales promotion. It is possible, in part at least, to extend the influence of' open bid ding, award to low bidders, and the use of specifications to purchasers who
315
have neither the technical knowledge nor the volume requirements which makes it feasible for them to use such policies directly.
This could be done if
(1) differentiated products were labeled to show that they met a nationally accepted standard specification, (2) some agency independent of the sellers certified that the products in fact were of the quality stated on the label, and (3) if buyers were informed regarding the meaning of the statement on the labels and acted upon the information.
Individual small-quantity buyers,
however, do not have enough influence to force sellers to adopt such labeling programs.
It is not relevant to the present study to explore the problems
of ultimate consumer buyingj
the problem is stated here only to contrast
the position of the two types of buyers and to point out the possibility of extending the effects of specifications and price competition to all mar kets and buyers.
3.
Framework for Tracing the Consequences of the Government1s Policy The consequences of the Government’s policy are analyzed separately
in the following pages for (1) markets in which products are now considered by buyers and sellers as being homogeneous, and (2) markets in which the use of specifications reduces to homogeneity competitive products, now considered by most buyers, aside from the Government, as being differentiated.
The con
sequences in the latter group of markets are analyzed in two subgroups, (1) those markets in which the products defined by specifications are in fact homogeneous in all material respects, and (2) those markets in which the products are in fact homogeneous in application but materially differenti ated in total utility.
This, it will be recognized, is substantially the
same classification according to which the evidence and analysis of the operation of the sealed bids device were organized in the previous chapters.
316
No analysis is given for products which are differentiated to the point where direct price competition cannot be achieved and sealed bids and speci fications are not applicable.
The alternative policies adopted by the Govern
ment do not differ greatly in such markets from those used by private buyers. In each case, that of homogeneous products and that of differentiated products, the analysis is made on the assumption that all buyers who can do so economically, adopt policies of open bidding, award to single low bidders, the use of objective specifications and of making bidders' prices available to competitors.
Subsequently the effects of the present use of the Government's
methods are outlined*
B,
Consequences of the Government's Policy in Markets for Homogeneous Products
1.
The Immediate Effects of the Use of Sealed Bids The evidence and the analysis in Chapter VII indicate that in periods
when there is some excess capacity in sellers' firms, and particularly when sales in the market are declining, sealed bids result in lower contract prices than limited competitive bids. result of increased competition.
The lower prices are principally the
At times the lower costs of obtaining busi
ness when sealed bids are used lead sellers to quote low prices. In contrast, when sales are rising and sellers price with demand rather than costs in mind, the evidence suggests that prices to buyers using sealed bids rise more rapidly than those to buyers using limited competitive bids. If the increased activity is prolonged, the contract prices obtained by sealed bids will rise until they are higher than prices obtained by limited competi tive bidding, but they are higher for very short periods if there are no un usual obstructions to increasing the production capacity in the industry.
317
2.
The Effects if Sealed Bids Were Used Generally in the Markets If it is assumed that all buyers who could economically do so adopted
the policies of open bidding, award to single low bidders, and making bid ders' prices available to all competitors and other interested persons, the products, the number of buyers, and the number of sellers would be unaf fected.
The buyers in these markets now use specifications and the only
change would be the shift in other buying policies. The first question which arises is, how many sellers would quote?
If
continuity of supply were eliminated as a factor in making awards and con tracts were let to single low bidders, opening bidding to all would sub stantially increase the number of bidders over the present 6 or 8.
The
certainty that contracts would be awarded to low bidders would bring forth bids from all suppliers seeking additional business, as well as those pre viously included in bidders lists.
An unequivocal and publicly announced
method of making awards is a necessary condition for obtaining the maximum competition.
Access to bidders' quotations fortifies this policy by en
abling unsuccessful bidders to ascertain that they were, in fact, not low. Another question is, what would be the consequences of abandoning awards made to assure "continuity of supply" in favor of awards to low bidders regardless of past or future supply relationships with the buyer? Continuity of supply means (1) being favored with continued shipments from suppliers when shortages force voluntary rationing, (2) assurance that the goods delivered vail meet the requirements of specifications and, therefore, that there will be no interruption of supply because of rejections, (3) as surance of delivery on scheduled dates, and (k) a willingness of the sup plier to make prompt settlements of any disputes which might interrupt ship ments •
318
At present users of the sealed bids device, almost entirely govern mental bikers, report that they have difficulty in obtaining adequate sup plies during periods when sales in the industry press very heavily on pro duction capacity.
The evidence reveals that during such times fewer sel
lers bid, prices are high, and on occasion it is necessary for the buyers to accept off-standard products.
Private buyers using limited competitive bids,
however, also complain of similar difficulties during such times, for example, during the first years after World War II.
There is no evidence which indi
cates that the users of the sealed bids device are forced to do without sup plies at such times, but
itdoes appear that buyers using
sealed bids are
forced to pay premium prices to obtain their supplies. From the viewpoint of the individual business establishment the willing ness to pay some premium during periods of low business activity with the expectation of being rewarded by continuous supply during times when sup pliers must ration their production, may be a profitable policy.
Some such
firms may be favored with prompter shipments and larger quantities of sup plies when the supply is actually less than the demand at current prices, but all buyers could not quantities.
beso rewarded and some must get
along with smaller
Furthermore, if there is no prohibition against raising prices
and no unusual barriers to increasing capacity, the shortages would be only temporary and would be relieved as soon as adjustments in prices and capacity are made.
If all buyers adopted the sealed bids procedure, price, rather
than the individual sellers’ estimates of the long-run profitability of their customers’ accounts, would ration supplies. The uniform quality of the goods delivered, prompt shipments, and prompt adjustments of disputes are functions of the efficient organization of seller^’ firms.
If the present strict interpretation of responsibility
319
of bidders used by the Government is broadened sufficiently to permit the exclusion of suppliers who do not perform satisfactorily in the respects noted above, the open bidding and single award features of sealed bids would not interfere with continuity of supply. It appears to be reasonable to conclude that the adoption of sealed bids by all buyers in the market would result in a substantial increase in the number of bidders for each contract and no less assurance than now of a continuous supply for buyers generally. The next question is, what would be the effect of the shift in buyers* policies on prices?
The increased number of bidders, the consideration of
price alone in awarding contracts, the elimination of multiple or rotating awards, and the availability of bidders’ prices to all sellers and other buyers would be expected initially substantially to increase price competi tion in the markets. The markets under consideration are at present competitive and the increased competition would be a matter of degree.
Nevertheless, the lower
prices and the fear of increased price competition might well induce sellers in some markets to attempt to persuade all sellers in the market to adopt policies of stabilizing prices, particularly in industries where overhead costs are important and dominant firms are present to provide the leader ship for such shifts of policy.
An increase in illegal price agreements
would also probably occur. It is improbable that efforts to stabilize prices would be successful in many of the markets being discussed here, because (1) at present a degree of price competition exists in the markets and the assumed shift in policy would only intensify it, (2) the fear of "price wars" and the consequent disappearing profits would be alleviated by the sales of a portion of each
320
firm's output by brand names at stable prices in closely associated markets, (3) open bidding would offer every chance for firms which quote competitively to profit by not conforming to any uniform industry policy to adopt stable prices, and (it) the availability of bidders* prices would probably encourage rather than discourage price competition. The first two of the points enumerated above need no further comment, but the last two do,
’St is noticeable in Government purchasing that sellers
in many markets depart from their established price policies and quote com petitively for contracts in order to meet competition of rival firms.
Usual
ly the firms which initiate the competitive pricing are the smaller firms thought of in the industry as "fringe" or "minor" companies.
Typically
these are firms which rely for their volume of business on local distribu tion and on contract sales directly to large-quantity buyers.
Their ex
pansion in the markets for branded products sold through wholesalers and retailers is made difficult by the investment required in advertising and sales promotion to establish wider distribution.
Their expansion in the
primary markets where sales are made directly to large users is made diffi cult by the limited bidding feature of present buying policies.
Open bid
ding would admit bids from small firms which are responsible and reliable sources of supply and which could be expected to bid competitively rather than join in industry-wide policies of stabilizing prices.
The remaining
firms would then find it necessary to resort to price competition or allow their share of the market to be captured by the low bidders. Availability of bidders' prices to competitors can have quite differ ent effects in different markets.
If the market is very effectively organ
ized to support a general policy of stabilizing prices and all sellers profess to adhere to such policies, the availability of bidders' prices could be ex
321
pected to discourage effectively any deviations in the form of price cutting. In markets where direct price competition for individual contracts now exists, fear of prosecution under the Robinson-Patman Act might deter some price cutting that is clearly discriminatory and is engaged in at present under the cover of confidential treatment of price quotations. the Act, however, prevents price competition.
Nothing in
When sellers find it profit
able not to adhere to the policies adopted by the majority of firms, and when open bidding is practiced generally, the availability of contract prices would work to inform buyers of the existence of low price sellers and price competition vrould be stimulated.
This effect could be expected particularly
in industries where there are many sellers, and leaders in the industry find it difficult to persuade all firms to adhere to policies of stable prices. The facts that open bidding, award to low bidder, and availability of bidders* prices would facilitate the growth of price competition which is already present to a degree, together with the fact that sellers are relatively numerous in the markets, lead to the conclusion that the net result of the assumed change in buying policies would be an increase in price competition in the majority of the markets. If, under the assumed conditions, sellers* bids vary for each contract, the effect on prices would be qualitatively the same as now in Government buying;
prices would be lower than the present prices during periods of
excess capacity, and higher during periods when sales volume presses on capacity. ferent.
Quantitatively, however, the expected effect might be quite dif The present low prices to the Government are attractive to sellers
partly because they do not establish a precedent for quotations to all buyers, and partly because the Robinson-Patman Act permits sellers to dis criminate in favor of the Government.
Under the assumed conditions sellers
322
would be unwilling to quote prices based on concepts of low marginal costs to all buyers.
When prices are rising, sellers would be able to get as
high prices as they do now from the Government only from those buyers whose demand is no more elastic than the Government's.
The most likely result for
most buyers would be that the amplitude of cyclical fluctuations of prices would be less than for the current fluctuations of Government contract prices. In particular, prices would not be expected to reach as low a level, and it is uncertain whether or not, for the majority of buyers, the average of contract prices over a complete cycle would be any less than at present.
Opening bid
ding to all sellers and single awards to low bidders, however, would increase the influence of low cost producers who would find the way smoothed for quot ing to more buyers.
The pressure of high-cost marginal producers to cut
costs or cease production would be increased and this would lead to lower prices to many buyers over periods long enough for cost reductions to be re flected in contract prices. If, under the assumed conditions, sellers avoided calculating prices for each contract in favor of quoting stable, but not uniform, prices, the com petition of low-cost sellers quoting low prices would force revisions down ward of the stable prices of sellers whose prices were causing them to lose business and the expected result in time would be lower prices to many buyers. Thus, while the immediate result for most buyers might be some changes in contract prices, but little if any advantage over the cycle, in time the widening and intensification of competition would lead to lower prices by removing the present sheltering influence which limited competitive bidding extends over sellers who bid high prices. Under the assumed conditions firms would dispose of a substantial seg ment of their output in the competitive markets and could profitable re organize their productive factors to take advantage of cost reductions made
323 possible by the shift in buyers1 policies to sealed bids.
This would result
in reductions in advertising and sales promotional costs.
Furthermore, the
added pressure of lower prices on costs would exert a strong influence on marginal producers to reorganize on a lower cost basis, and would increase the incentive for all firms to reduce costs in an attempt to maintain profits. Where specifications in general use in the markets are performace speci fications, they interpose no barriers to product changes to reduce costs, so long as the redesigned product yields the specified utility.
Successful ef
forts to reduce costs, therefore, cannot lead to quality deterioration and always result in increases in utility-cost ratios.
If price competition is
effective, this will result in higher utility-price ratios for buyers. The net effect of the changes described above in the organization of production would be the release of some factors of production due to the lowered sales and production costs.
Income would be redistributed from sel
lers whose prices were lowered by the increased competition, to buyers who would have paid higher prices under their former policies. profits is uncertain.
The effect on
The decreases in profits due to lower prices would be
offset, at least to some extent, by the increase in demand, by cost savings, and by the higher profits during periods when prices were higher. G.
Consequences in Markets Where Specifications Reduce Differentiated Products to Homogeneity In markets where products are differentiated but are in fact homoge
neous in application without any immediate loss of efficiency, the Govern ment's policy of using specifications reduces rival sellers' products to homo geneity by eliminating immaterial differentiation and ignoring any material differentiation, and thereby permits direct price competition.
Private buyers
use specifications in purchasing some differentiated products, particularly
32k expensive equipment, but only to evaluate material differences in competing products rather than to reduce them completely to homogeneity. The Government's price policies of open bidding, award to single low bidders, and making bidders’ prices available to competitors are different from the policies pursued by private buyers in these markets, just as they are in markets for homogeneous products.
The consequences of the shift to
such policies are qualitatively the same in both types of markets.
For these
reasons the following analysis centers on the effects of product policy of the Government. 1.
The Immediate Effects of the Use of Specifications The evidence and the analysis presented in Chapter VIII led to the con
clusion that in markets for differentiated products, the use of specifica tions results in lower prices than the use of approved products lists based on brand names for three reasons:
(1) it eliminates the profitability of
expenditures to create immaterial differentiation, (2) It eliminates from sellers' price computations any reliance on product differentiation to support high prices and focuses sellers' attention on price competition, and (3) it sorts out from all competitive products those which are in fact homogeneous and thus enables buyers to eliminate from their calculations any irrational estimates of presumed differences and safely make awards to low bidders. The lower prices result in higher utility-price ratios for all products purchased except those for which material differences in competitive pro ducts have not been evaluated in making awards.
The failure to evaluate the
added utility for such products may or may not offset the lower prices re sulting from direct price competition. In these markets the Government's policy offers the opportunity to re duce costs by amounts attributable to the creation of immaterial differentia tion as well as by amounts attributable to efforts to be placed on limited
325 bidders lists and to influence awards. 2.
The Effects if the Governments Policy Were Generally Used It is assumed that the shift to the use of specifications by all buyers
who could economically do so, would result in substantial markets in which the sellers would dispose of a sufficient portion of their output to make it profitable for them to redesign their products, reorganize productive facilities to lower costs, and to adjust price policies in response to the shift in the buyers' policies.
It is also assumed that a large portion of
the output of each firm would continue to be sold in markets where the same products are differentiated for sale to small-quantity buyers. a.
Markets for Immaterially Differentiated Products It can be fairly assumed that most of the products considered by the
Government to be immaterially differentiated in present markets, such as of fice and maintenance supplies, would be so considered by a great majority of buyers if they were in the possession of the facts on which the Government bases its judgement.
The general adoption of standard specifications by buy
ers of such products would establish markets for homogeneous products with out any change in the physical products.
These markets would have all the
characteristics essential for direct price competition:
many buyers, numbers
of sellers, and a homogeneous product. If sellers responded to these conditions as they do now to the similar conditions in the very limited markets in which the Government buys, they would bid competitively for contracts and the result would be substantially lower prices than at present.
Sellers would be able to make substantial cost sav
ings from the elimination of the costs of immaterial product differentiation which would be no longer profitable.
These would be in addition to the sav
ings made possible by open bidding and award to low bidders. Prices and costs would be lowered by very different percentages in
326
markets for different products depending on the degree to which successful immaterial differentiation supports high prices and results in high costs* For some products the costs of immaterial differentiation may be greater than all other costs, for other products they may be relatively small com pared with other production and distribution costs.
For some products, of
which aspirin is an outstanding example, immaterial differentiation supports prices that may be double or more the prices of competitive products;
while
for other products, say typewriter paper, the price difference that can be supported by immaterial differentiation is much smaller* If the quantitative differences are taken into account, the consequences of the lower prices and the cost savings would be much the same as those previously traced in discussing the shift to sealed bids in the markets in which products are now homogeneous.
Certain differences, however, should be
noted. The use of specifications and the consequent prospect of active price competition would increase the incentive in many cases to standardize de mand and centralize purchasing in large organizations.
At present the in
centive to increase contract quantities exists only where patterns of stable prices offer discounts for quantity purchases, and is limited by the amount of the discount.
The possibility of obtaining further price reductions from
more active competition would increase the incentive to consolidate require ments.
This is at present very noticeable in Government procurement where
the consolidation and stores programs have grown in response to the possibi lity of obtaining substantially lower prices through active price competi tion for larger quantity contracts.
The general consequences would be to
shift purchasing away from retail toward primaiy markets. For many immaterially differentiated products the most imposing barrier
327
to entry of new firms into the market or the expansion of existing small scale firms, is the investment required to establish successful immaterial differentiation.
This investment is in advertising, sales effort, dealers’
aids, and similar expenses.
The purchase of these products on objective
specifications breaks down this barrier and greatly facilitates the entry of new firms and the expansion of the capacity of small firms in the market. Where the investment in immaterial differentiation is small, this effect of the use of specifications would be less, but would still be present.
To the
degree that the need for such investments is reduced the optimum size of firms would be reduced. The tendency for firms to avoid the consequences of price competition by turning to policies of stabilizing prices could be expected to be stronger in the markets discussed than in the markets where products are now considered to be homogeneous for the reason that the shift here is from stabilized prices to competitive prices.
Policies of stabilizing prices, however, are more
easily maintained where they are backed up by immaterial differentiation which takes the edge off the influence of buyers1policies,
immaterial dif
ferentiation also provides an outlet for the competitive urge to increase sales.
The desire of firms to return to the sheltering influence of stabi
lized prices would be offset, at least to some degree and perhaps entirely, both by the increased ease of entry of competitive firms and by clearcut policies of product homogeneity employed by buyers. It should also be noted that product homogeneity is not automatically achieved by the individual decisions of buyers to shift from purchasing on the basis of brand names to purchasing on the basis of specifications.
Each
buyer might adopt his own specification. The problems raised by the result ing duplication of specifications are left for the following discussion,
328
however, in order to avoid repetition.
b.
Markets for Differentiated Products Which are Homogeneous in Application but Materially Differentiated in Total Utility In most cases the distinction between products which are interchangeable
in application but differentiated materially in total utility, and those which are differentiated in all important respects, is clear to the buyer. In other cases slight differences in the ability of products to fill the need for which they are purchased raises a question as to whether more is gained by the price competition which will result from considering them homo geneous than is lost by ignoring the material differences in application. In any event the buyer is forced to make a decision because his purchasing method depends upon it.
If he decides that competitive products can be con
sidered homogeneous in application, he can buy on specification and is able to compare the utility-price ratios of rival offers with a good deal of pre cision.
If he decides that competitive products are not homogeneous in ap
plication, the only specifications which can be written to describe
the
utilities the products have in common are so general that he must rely on less precise methods for comparing utility-price ratios. In the case of materially differentiated products all buyers may not be in agreement as to which rival products can be considered homogeneous in application.
The consequences of the general adoption of the Government's
policy depend^ on the one hand on the distribution of preferences of buyers /
for the alternative products and on the other hand on the ease with which sellers can adjust their production to make the products preferred by the buyers. If production of the commodity is obstructed by patents, other proprie-
329
tary rights, or investment and as a result there is only one seller, the market is monopolized;
direct price competition on the basis of specifica
tions defining a homogeneous product is impossible and the seller's control over price is limited only by the elasticity of demand.
The elasticity of
demand is determined largely by the nearness of substitutes, in other words, by the utility-price ratios of substitute products.
The distinctive features
of the Government's policy— sealed bids and the use of specifications— are inapplicable for these products for which there are single sellers. If only one buyer prefers the product, then it is monopsonized by him, and his ability to reduce the price to cost plus a normal profit is limited only by the elasticity of supply which is largely determined by the ability of sellers to transfer productive factors to the production and sale of other goods.
Aside from military goods which are not considered in this
work, the Government buys few products which are clearly of this type.
Post
Office trucks are an example, but other Government specification products are used by a few other buyers.
In all cases suppliers are able with com
parative ease to shift their productionto other goods. A great many important commodities fall between the extremes noted above.
These are supplied by numbers of sellers, and are preferred by
numbers of buyers.
The products are interchangeable in application but
differentiated in other utilities.
The question is, what would be the con
sequence in the markets for such products if buyers generally, as the Govern ment does now, ignored the material differences and considered rival pro ducts to be homogeneous? If all buyers arrive at the same judgement as the Government regarding the most desirable quality level for the product, they would all shift to the use of Federal Specifications.
The consequences would then depend on
330
the ease with which producers are able to make adjustments in their pro duct designs.
If adjustments can be made without substantial investment,
producers would adjust their products so that they just meet the require ments of the specification.
This would result in uniformity of utility,
but not in form, formulation, appearance, or in cost, as many designs would yield the specified utility.
If adjustments are difficult and costly, sel
lers whose products fail to meet the minimum requirements, would, nevertheless, be forced to redesign their products or cease producing them, while sellers whose products yield more than the minimum utility specified might find it more profitable to continue their manufacture without incurring the ex pense of redesigning.
The decision would turn upon the cost of redesign
ing compared with the difference in unit costs of the present and redesigned products.
In time the tendency would be toward production of a homogeneous
product by all manufacturers of the designs which are the least costly to produce.
Thus, the ideal goal would be a product which gives the optimum
cost-utility ratio.
If price competition is effectively established, the
long-run tendency would be toward the sale of products which yield the maximum price-utility ratios to buyers. The needs of private buyers would often be different from the needs of the Government and Federal Specifications in such cases would be inappropri ate.
Where the need for homogeneity in application is the same but the needs
for other utilities differ, the result of the adoption of specifications in buying also depends on the ease with which the products can be adjusted to meet the different needs. The needs of buyers for utilities, such as prompt delivery, instal lation service, or maintenance and repair service, often vary from time to time.
Definitions of these utilities are usually appended to the specifica
331
tion for the physical product according to the need at the time of each invitation to bid for contracts.
If sellers can adjust their organization
easily to provide the specified utilities, the number of sellers who are qualified to bid remains the same.
If some firms cannot adjust economical
ly to provide the specified utilities, the pattern of bidders in the market is changed for the particular contract or contracts.
If the needs of some
buyers for utilities, such as repair and maintenance service,are constant while others do not need such services, markets for two products which are physically the same, but which differ in the service provided, will be es tablished. Similar adjustments are necessary where the needs of buyers differ for utilities physically embodied in the product, such as serviceable life.
In
such cases buyers would adopt specifications which are similar to Federal Specifications in defining the utilities insuring product interchangeability in application, but which are different in defining other utilities.
The
result would be the establishment of a number of different grades which are interchangeable in use but yield different utility in total serviceable life, or in other respects. Buyers shifting to the use of specifications might also differ with the Government as to what constitutes homogeneity in application.
Their need
might be the same, but their definition of a product which fills the need might be different.
In such cases the result would be a demand for products
which are differentiated in all important respects from those specified by the Government.
If such demands are sufficiently large, a market for a dif
ferent product would be established. Thus, the shift to specification buying might lead, in any one market, to the development of a single homogeneous product, grades for products which
332
are homogeneous in application, or numbers of different kinds of products, depending on the distribution of preferences of buyers expressed in the specifications adopted and the volume of purchases made on each specifica tion. The decisions of rational buyers are not made on the basis of utility alone, but on utility-price ratios.
The product which embodies the greatest
ability to fill a need is not likely to be the one which offers the maximum utility-per-dollar.
Rational buyers are careful neither to "overbuy quality",
nor to "buy on price".
Characteristically the choice of the best buy in
volves, therefore, some compromise on utility in order to obtain the maximum utility-price ratio.
If the preferences of buyers in terms of utility alone
are distributed evenly over the range of possible degrees of utility, it is practically impossible to produce the number of varieties of a good to satisfy all fine gradations of taste without tremendously increasing costs and, in turn, prices and the utility-price ratios of the goods offered to buyers.
When costs and prices are considered, it is necessary to limit
production to a discrete number of product varieties.
Conceptually, for a
given distribution of needs of buyers and state of knowledge of product design and production techniques, there is an optimum number of product varieties which will offer buyers the opportunity of maximizing the utility they receive for their dollars.
It is usually possible to arrive at a rough
approximation of this optimum number of product varieties and at specifica tions which define the characteristics of each of them, but this desirable result is not brought about automatically by decisions made independently by buyers and sellers. Historically it has been amply demonstrated that when buyers individual ly adopt specifications, the diversity of products is by no means reduced
333
to the economical minimum.
This occurs both because of the lack of knowledge
on the part of buyers and sellers and because of the drive by sellers to obtain profit advantages through differentiation of products. Most buyers have insufficient resources to make comprehensive surveys of alternative products offered for a given use, or to conduct the research needed to reveal the material differences and distinguish them from differ ences which are immaterial.
These buyers must, therefore, write their own
specifications according to their best judgement of what kind of product will serve their needs most efficiently.
They may obtain the assistance of
favored suppliers who consciously, or without intent, influence the buyers to write specifications which favor their products and exclude competitive products.
The net result is a superfluity of specifications which require
design differences in products serving the same need.
Sellers, if they are
to sell to all buyers, are forced to produce an excessive variety of pro ducts.
The result, typically, is less than optimum production-run quantities
with consequent high costs.
For buyers the result tends to be higher than
necessary utility-price ratios for the products offered them in markets. Under the assumed conditions of general adoption of specifications, history could be expected to repeat itself:
excessive variety of products
would persist in the markets until the confusion leads to cooperative action to standardize specifications.
In the past this has been accomplished
through the agency of national standardizing organizations which are in dependent of direct control by either sellers or buyers, and which are in a position to gather all the available data bearing on the problem and ration alize all the conflicting opinions of buyers, sellers, and producers. The use of specifications is no bar to product competition.
Products
embodying either greater or lesser utility may be designed and offered as
33k
substitutes for the specified product.
If they offer buyers greater utility-
price ratios than the old products, some buyers could be expected to shift their purchases to the new products.
The usual procedure in the markets
being considered here, would be for the seller to submit samples of his new product to the buyers;
if, after testing the new product, the buyers find
that it offers a higher utility-price ratio than the product they have been using, they will rewrite their specification to define a product of the quality offered by the innovation.
If all buyers of the old product arrive
at the same judgement regarding the new one, and there are no serious invest ment or legal barriers to prevent all sellers from producing the new product, the entire market will in the end be the same as before the innovation, with the exception that the product will be improved.
]h other cases the result
of innovations in design of products would be the establishment of different grades or kinds of products which would be substitutes for the old products. Such innovations in markets where specifications provide the basis for trans actions, lead to changes in the existing market-wide standardized specifica tions or to the establishment of new ones defining the new grades or kinds of products• The general effect of the adoption of specifications would be the elimination of product varieties based on immaterial differentiation, a substantial reduction in the varieties based on material differentiation, a shift of sellers’ attention in designing products from the saleability of the products more directly to their utility, and a growth of product re search facilities and national standardizing agencies.
These would lead
to (1) an increase in the utility-cost ratio of products, (2) cost reductions due to increases up to optimum production-run quantities and to lowering of
335
costs of distribution for the fewer products, and (3) the establishment of the conditions for direct price competition among sellers of the specified homogeneous products.
The ultimate consequences of the general use of speci
fications would depend on the effectiveness with which direct price competi tion is established and would be the same as those traced previously in the discussion of homogeneous products.
t). The Effects of Standardization of Demand and Centralization of Purchasing The buying devices of the Government operate to increase price competi tion when purchases are made in moderate to very large quantities, although in general the larger the quantities and the nearer the market to the origi nal producer, the greater the prospect of obtaining more active price com petition and the resulting lower prices.
The increase in contract quantities
by standardization of demand and centralization of purchasing within firms has, however, other consequences aside from increasing the possibility of obtaining more active price competition. The general'tendency of larger contract quantities is to enable buyers to shift their purchases away from retail and toward primary markets.
Buyers
who purchase in retail markets are often able to buy in wholesale or even primary markets after contract quantities are increased by the standardization of their requirements and centralization of purchases.
In other instances
the increased quantities result, not in a shift from one market to another, but in lower prices due either to more active price competition or to quanti ty discounts provided in scales of stable prices.
In any case, from the
336
viewpoint of economics, the significance of purchasing in larger quantities lies not only in the lower prices but in the redistribution of the functions performed by sellers and buyers which normally occurs. In some cases functions usually performed by sellers are eliminated, buyers do not find it necessary to perform any additional functions in their own organization, and the increase in contract quantities results in a clear economic gain.
For example, where the larger contract quantities result
simply from the consolidation of a number of orders with delivery direct to the point of use, shipments are often made directly from manufacturers1 plants.
Functions of storing and delivery normally performed by wholesalers
and retailers are eliminated and there is a reduction in the effort expended in contracting, and no loss in utility to the users in the buyers' organiza tions.
If a substantial volume of purchases is so organized, productive
factors of retailers and wholesalers are released for other employment and no offsetting employment of factors is required in buyers' organizations. In other cases, order quantities are increased by anticipating require ments and the buyer's organization must take on some of the functions of distributing goods, particularly those of storage and issue, which were previously performed by sellers.
These require the addition of facilities
and personnel as do the functions of standardization and consolidation of demand.
The added facilities and personnel do not result in large in
creases in costs to buyers.
The costs of requisitioning goods by the of
fices which use them within an organization are the same whether the requi sitioned quantities are purchased separately or are consolidated.
The costs
of contracting are significantly reduced by combining many requisitions into one, and letting one contract instead of many.
The savings in con
tracting partially offset the costs of standardization, storage, and issue
337
of goods but these added functions result in some increase in administrative effort ■which must be paid for from the price reductions expected from largequantity buying. The experience, not only of the Government but of other organizations as well, has demonstrated that the savings from lower prices far exceed the cost of performing the functions which must be added because of large-quantity buying.
In the case of the Federal Government the net saving after paying
the costs of the added functions is estimated to be about 30 percent.
The
majority of the goods purchased by the Federal Government are office and maintenance supplies and equipment.
The demands for such goods, in contrast
with demands for production materials, for example, arise in small quantities and must be satisfied by the delivery of small quantities of goods to the more than two million users scattered throughout the country.
To a smaller
degree all sizable organizations have similar problems of consolidating de mands and distributing goods in small quantities to the individuals who use them within the organization.
The fact that large organizations are able
to buy at price savings which far outweigh their costs of the distribu tion functions they must assume, raises the question of why distribution through wholesale and retail channels is not effective in delivering the goods to the same points of use at as low a cost.
A complete answer to this
question is probably impossible to formulate, but a brief discussion of the factors accounting for the lower costs of the goods the Government buys sheds light on the consequences of the operation of its purchasing policy. The answer seems to lie in (1) the specialized nature of the distribu tion of goods within a large organization compared with wholesale and retail distribution, and (2) in the lower prices brought by the price competition.
338
The savings resulting from the specialized nature of the distribution of goods can be illustrated by comparing the functions performed in the normal distribution of goods from the time of their manufacture to their delivery at retail to the individual users, with those which must be per formed when the goods are purchased by the Government directly from the manufacturers and similarly distributed to the same users. By either channel, through wholesalers and retailers or through the Government's supply centers and agency storerooms, the goods are shipped in large quantities from the manufacturers and must be stored, broken down into small quantities, repacked, and shipped in the requisitioned quantities to the point of use. This physical handling and shipping of goods certainly can be done as economically through one channel as the other if the accounting is made in terms of man-hours and physical facilities required to perform the functions.
The dollar costs of these functions to the Government, how
ever, will be almost certainly much greater if they are paid in the form of retail prices rather than actual salaries and rents for Government employees and facilities.
The Government stocks only fast-moving large-volume items
which can be handled economically compared Tilth slow-moving items.
The
accounting methods of wholesalers and retailers are unlikely to be suf ficiently refined to allocate a smaller proportion of costs to such items than to slow-moving items.
A part of the service of these firms is to
carry a complete assortment of goodsj
the prices of the fast-moving items
in many cases cover a part of the costs which refined cost accounting would assign to the slow-moving items. Sales promotion includes the personal selling of manufacturers, whole salers, and retailers.
Under the assumed conditions the efforts of whole
salers and retailers are eliminated, and the sealed bids device makes it
339
possible for manufacturers to reduce the amount of effort in personal sel ling when supplying the Government. "Wholesalers to some extent, and re tailers to a much greater extent, must provide facilities for the physical display of the goods they sell. ment distribution.
These facilities are unnecessary in Govern
With the exception of manufacturers1 catalogs and the
portion of manufacturers1 advertising which provide information about ma terial differences in products, the functions served by. manufacturers1, wholesalers1, and retailers' advertising and sales literature are of no significance to the Government as a buyer.
In Government distribution these
are replaced by the Store Stock Catalog and a small number of instructional memoranda, and some effort of stores personnel to inform the using agencies of the availability of goods carried in the stores.
The cost of the Govern
ment's catalog and sales effort is greatly reduced by the concentration of demands on the minimum number of items which will serve the need. Manufacturing costs are probably not greatly affected, but some savings are possible where products can be adjusted at cost savings to meet specifi cations, and where large contract quantities bring run quantities nearer to optimum size.
The savings in manufacturing costs attributable to the volume
of purchases made by the Government are not greatj
such savings, however,
would be substantial if all firms which could do so economically adopted specifications, standardized demand, and centralized purchasing. The cost savings in manufacturing and those resulting from elimination of distribution functions probably do not explain the full amount of the price reduction obtained when order quantities are increased.
Some part is
induced by the combined effect of the sealed bids device and the larger con tract quantities on the pricing calculations of sellers which is revealed in increased price competition,.
32*0
The situation discussed above reflects the maximum savings that would be expected from use of the Government's policies.
In other cases,
where buyers are unable to purchase directly from manufacturers but deal with wholesalers, fewer functions would be eliminated.
To some degree,
however, the specialized nature of each firm's distribution can be ex pected to result in a saving in physical factors of production if it pur chases in large quantities, and in savings from, price competition if it uses specifications and sealed bids in its purchasing.
Chapter XIII Re commendations
A.
Re commendations for Increasing the Effectiveness of Government Pur chasing The measures to increase the effectiveness of Government purchasing
outlined below are well recognized by officials of the General Services Administration as being desirable. programs.
They all are extensions of existing
The barriers to their adoption are, for the most part, the diffi
culties of obtaining adequate appropriations from Congress.
Choice of Products and Standardization of Demand.
The extension of
three interlocking programs is required to maximize the gains that can be made from improving the choice of products:
commodity research, the develop
ment of Federal Specifications, and commodity cataloging. The amount of commodity research falls far short of covering the needs of developing and revising adequate Federal Specifications.
Additional pro
grams should be initiated wherever they are self-liquidating over a period of a few years and should include not only commodity testing and the develop ment of test methods, but also research into use requirements, production costs, and market prices. The availability of up-to-date and adequate Federal Specifications is basic for the rational application of the Government's purchasing policy.
3h2
Federal Specifications currently in effect are only one-third of the number required to cover all important commodities.
The development of a
complete system of Federal Specifications should be accomplished by the ad dition of staff and the streamlining of procedures.
Closer cooperation is
desirable with national standardizing organizations which are unifying purchasing specifications. At present the dominance of the armed services in the development of the Federal Catalog System threatens the ultimate usefulness of the catalog for civilian as well as the military agencies.
The staff of the Federal
Supply Service should be increased to enable it to develop the item descrip tions for purely civilian products and to insure that the work of the mili tary agencies will fit into the envisaged complete Federal Catalog System. Evaluation of Quality Differences in Making Awards. The failure to evaluate the quality of competitive products above the specified minimums is at present a major deficiency in Federal Government purchasing.
The
corrective is the development and use in contracting of evaluation formulas. When used by the Government, such formulas must be included in invitations to bid and must be technically defensible if questioned by unsuccessful bidders.
Their increased use, therefore, is dependent to a large degree
on the commodity research programs recommended above.
Information available
at present, however, should permit some increase in the use of such methods. Qualified Products Lists. The expense of inspecting small deliveries of many products now obstructs the effective use of specifications and centralized contracting.
The use of qualified products lists to overcome
these difficulties should be considerably extended.
Purchasing Program Research. At present decisions regarding purchasing programs are based on inadequate data.
There is little information on the
volume of purchases either by agencies or by the kinds of goods.
Only a
few spot studies are available of the effectiveness of various programs compared with alternative programs that might be adopted, and little infor mation is gathered on ways in which programs might be improved.
Studies of
competitive prices, seasonal and cyclical price trends, the influence of freight costs on delivered prices, and other market data are largely lacking. Congress has on several occasions refused to grant appropriations for es tablishing program research units.
The Federal Supply Service has been able
to develop some information without specific appropriations, but definite approval and funds for a statistical and analysis section are badly needed. B. Re commendation for Making Purchasing Data Available to Other Buyers The data and experience developed by the Federal Government in its purchasing could be of great value to other buyers, and particularly to small business firms which have limited funds and facilities for obtaining such information.
At present these data are collected for the sole purpose
of solving particular supply problems of the Government.
In its undigested
form the information is of limited use
to other buyers and may evenbe mis
leading.
for each important commodity and
If, however, it were gathered
organized into a commodity handbook for purchasing agents, it could be ex tremely helpful to all buyers of the same commodities. The handbook could include information on the kinds and grades of com modity which are offered for purchase,
the uses for which each kind and grade
are best adapted, the most efficient methods of
using and maintaining the
commodities, description of the normal channels of distribution and types
3kk
of sellers, a listing and evaluation of the specifications which are avail able for use in buying, an explanation of methods of inviting bids, whether or not submittal of samples should be required, the most appropriate methods of evaluating competitive offers when awarding contracts, and methods of inspection and testing the delivered goods. The General Services Administration does not have the authority to prepare and distribute the kind of information suggested here.
The Depart
ment of Commerce, however, could appropriately undertake the compilation and maintenance of such a handbook, particularly in view of its responsibility for aiding small businesses.
The handbook would provide an effective means
of making the commodity and purchasing data possessed by the Federal Govern ment available to the business community generally. £.
The Possibilities of Widespread Adoption of Features of the Government1s Policy Each of the important elements of the Government's purchasing policy
is used to some degree by private buyers.
Wo one of the features is in
any exclusive sense "the Government's policy".
It is the consistent and
rigorous application of all the elements in purchasing that makes the Govern ment's purchasing policy distinctive.
The policy is aimed at the goals of
making the most rational choice of products and obtaining the maximum price competition in buying them.
Private purchasers at times make rational
choices and at other times largely ignore the possibilities of wise choice, while generally they place only moderate emphasis on the importance of price competition in buying. The recommendations for improving buying practices summarized below will be received with widely different attitudes by different buyers.
When
316
making decisions regarding buying policies executives of business organiza tions are influenced by conflicting motivations.
On the one hand, as buyers
they are interested in buying at low prices and, therefore, in encouraging price competition through their buying policy.
On the other hand, as sel
lers they are interested in monopolizing their market and in discouraging ■ practices of the purchasers of their products which promote increased price competition. Governments and institutions, because they do not produce and sell goods and services for a profit, can adopt the policies with regard only for their effectiveness in improving purchasing.
Public utilities, whose pricing de
cisions are subject to direct public control, generally adopt buying policies which encourage competition.
Firms which find it to their interest to
avoid the rigors of price competition in selling their products, however, are likely to be chary of applying buying policies which encourage the maximum competition even though the markets in 'which they buy are quite different from those in which they sell.
Finally there are the buyers who
purchase nationally branded goods for resale, for whom, specifications and direct price competition in buying are completely inappropriate.
Specifications.
Most buyers who procure goods either for final con
sumption or as raw materials for manufacturing use specifications to some degree in purchasing, but few, if any, have taken full advantage of their possibilities.
All buyers can greatly increase their chances of maximizing
utility-cost ratios for the goods they procure by extending the coverage of their specification programs.
The full benefits can be achieved, how
ever, only if buyers support the work of national standardizing agencies and use their procedures and facilities to unify existing specifications.
31*6
Standardization of Demand. As is the case with commodity specifica tions, commodity catalogs keyed to specifications have not been fully utilized by buyers.
Most firms can substantially improve their choice of goods and
lower their costs of procurement and supply by the development of commodity catalogs to eliminate duplicate items and to relate specifications directly to each item to be purchased. Centralization of Purchasing. As specifications and cataloging pro grams are expanded, the possibility and profitability of consolidating pur chases of standardized items are greatly increased.
The expansion of central
ized purchasing, stores, central determination of purchasing policy, and the use of term contracts which centralize contracting but permit uncentralized ordering, can generally bring advantages in lower prices and from more rational choice of products. Open Bidding and Awards to Single Low Bidders. The evidence and the logic inherent in the relations between buyers and sellers lead to the con clusion that most buyers would receive lower prices and suffer no loss of continuity of supply by opening bidding to more sellers and making single awards to low bidders.
The essential core of the policies is that a clear
understanding be conveyed to all sellers that awards will be made invariably to responsible low bidders.
Private buyers can apply the policies more
flexibly than the Government is able to do.
More rigorous standards of
responsibility can be used to exclude bidders who may not prove to be accept able sources of supply.
It is possible to make multiple awards and still
increase competition by opening bidding to all sellers if the fact that multiple awards will be made to low bidders is clearly stated in the invita tions to bid.
Furthermore, private buyers can limit the application of the
3h7
policies to cases for which, in their opinion, any risks of discontinuity of supply are unimportant. Making Bidders1 Prices Publicly Available. From the viewpoint of the individual buyers, the profitability of making bidders' prices available publicly varies for different markets.
In competitive markets where sel
lers do not employ policies of quoting stable prices, the gains probably outweigh any disadvantages, while the reverse is true for markets in which sellers profess to adhere to stable prices.
In any event, it is important,
if price competition is to be encouraged, to make it as clear as possible to sellers that awards are made to low bidders, and to be as forthright as pos sible in explaining to unsuccessful bidders why they did not receive awards. ■Where possible this policy should be backed up by making bidders' prices available to all sellers. The application of the policies outlined above works to increase the rationality with which products are chosen for purchase, and facilitates price competition which forces sellers to produce the commodities chosen at lower costs and to deliver them to buyers at lower prices.
The wide
spread adoption by private, institutional, and other governmental buyers, to whatever degree is appropriate for each, of the various features of the Government's purchasing policy would undoubtedly result not only in benefits to the buyers, but to the economy as a whole.
31*8
Bibliography
1,
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19 Fed. Supp. 652 (1937). Lukens Steel Co. v. Perkins, 60 S.Ct. 513 (1939). New York Cent, and H. RR v. U.S. 21 Ct. Cl. lj.68. O ’Brien v. Carney, D.C. Mass. Fed. Supp. 761 (193U)•
Scott v. U.S., liU Ct. Cl. 52U (1909). U.S. v. Brookridge Farm CCA Colo., Ill Fed. 2nd lj6l (I9I4O), affirming 27 Fed. Supp. 909. U.S. v. William F. Hess et al, U.S. Distr. Court for the Western District of Pennsylvania, No lOij.62 Criminal, Washington, 1939. Executive Office of the President. Bureau of the Budget.
Fourth Annual Report of the Budget, 1925. Summary of Obligations by Objects, prepared each year by the U.S. Bureau of the Budget, mimeographed. Executive Orders of the President. No 6166, June 10, 1933. No 6197, December 193jf. General Accounting Office. Annual Reports of the Comptroller General. Opinions of the Comptroller General.
331
General Services Administration. Administrative Order No 26, Revision No 2, August lit, 1930. Administrative Order No 53, September 25, 1930. Directory of Federal Officials Purchasing under Federal Supply Schedules of the Federal Supply~Service (Washington, D.C. Headquarters) published by the Federal Supply Service of the General Services Administration, December 19il9* Justice, Department of Opinions of the Attorney General. Labor, Department of Bureau of Labor Statistics. Average Wholesale Prices and Index Numbers of Individual Commodities. Revised Statutes. Statutes at Large. Temporary National Economic Committee. Government Purchasing— An Economic Commentary, Monograph No 19, Government Printing Office, Washington, D.C. Study of Government Purchasing Activities, Report of the Procurement Division Group, Treasury Department Subcommittee. Verbatim.Record of the Proceedings of the U.S. Temporary National Economic Committee, Vol. IX (Steel Industry), October 26 to December 8, 1939. Treasury, Department of the Annual Reports of the Secretary of the Treasury. Federal Procurement, Clifton E. Mack, Director of Procurement Division, Treasury Department, Government Printing Office, Washington, D.C., 19^3* United States Code, Annotated.