Do we intend to have Government capital, Federal capital go in and remain in, or whether or not there should not be a program of phasing out, I do not know. I hardly think that the Military Establishment itself is the one to make that determination because their primary concern must be to get the equipment, or whatever it is that they need. They do not have the problem of evaluating the impact on our economy and future developments in our economy, although I know they realize that what they do is so large that it has this impact. But I do not think it would be fair to them to put the burden on them to make that decision.

So it comes back to civilian government-and where else in Government should the coordination come other than in possibly the Bureau of the Budget in advising the President.

One other subject-there is a technique on disposal of surplus goods which are in such vast quantities that it frequently can effect a saving to the economy. The Department of Commerce has a responsibility to-in fact, I think they can request disposition be phased out, of the surplus, so that it will not have too much of an impact on the economy.

Possibly the Department of Commerce is the one that might evaluate the point that I am presenting, but the question to you is, Could not the Bureau of the Budget be of some help in evaluating this?

Mr. STAATS. Mr. Curtis, I think it is quite possible that the Bureau could take the lead on this. I think this would be an area where we would really want to have, though, the participation of the Treasury Department and the Commerce Department who are very much concerned, and of course the Defense Department, and possibly the Council of Economic Advisers. This is not a problem which is limited to the aircraft industry as you know, although it is probably just as acute there as anywhere else.

Representative CURTIS. It became acute in the aircraft industry. These are the questions I asked in considering the request to extend the Renegotiation Act. I strongly advised against extending renegotations for the very reason, among many other reasons, that I thought our policy should be to phase Government capital out if we could on a reasonable basis, but I was distressed to not have anyone even thinking along the lines or trying to analyze the problem. It was put on an almost grammar school level, by the Chairman of the Renegotiations Board, that anyone who did not want to extend the Renegotiations Act wanted to allow a lot of people to have excess profits. This was ridiculous. I certainly do not want to do that, nor does any responsible public servant.

But the Renegotiation Act is a device that we have in military procurement and is involved in the overall policy-a very fundamental policy.

PROFITS ON CAPITAL SUPPLIED BY THE GOVERNMENT

Mr. STAATS. One of the issues you touched on is how much of the retained earnings are permitted for these companies in view of the fact that so much of their capital is supplied by the Government. Representative CURTIS. That is correct.

It is a question of whether we do want this process to be that it is Federal capital just operated by private enterprise.

On the other hand-and it is my suggestion, that it is unnecessarywe could get risk capital into this area; we would be better off to have it in and in the long run we probably would procure at a lower cost.

I can say this would certainly broaden the tax base, which I am always interested in. Every time the Government does these things or furnishes the capital, it does not become part of the tax base.

Well, you have been very patient. We really just sort of scratched the surface of these problems.

I hope that this committee will continue in this area and possibly we can define the areas where we think, at least in this committee's eyes, the Bureau of the Budget can function in trying to get on top of and keep on top of the problem.

Thank you very much.

Mr. STAATS. Thank you very much.

Representative CURTIS. The committee will stand adjourned until 2 o'clock.

(Thereupon, at 1:15 p.m., the committee recessed, to reconvene at 2 p.m., the same day.)

AFTERNOON SESSION

The CHAIRMAN. Our next witness will be the Honorable Perkins McGuire, who is Assistant Secretary of Defense for Logistics.

Mr. McGuire, we are very happy to have you with us and we look forward to your testimony. We know you have had broad experience in the supply management field both in industry and in Government. I looked over your statement, which is quite long, 24 pages, and which seems to be primarily descriptive. I wonder if it would be satisfactory to you if we print the entire statement in the record at this point, and then you could make a brief summary of it, together with such other comments as you wish to make with the understanding that of course you will be given the opportunity to correct your oral testimony.

I do think in order that we may get to the nub of the matter as quickly as possible with the minimum of time taken for pure description.

STATEMENT OF E. PERKINS MCGUIRE, ASSISTANT SECRETARY OF DEFENSE (SUPPLY AND LOGISTICS), ACCOMPANIED BY A. C. BANNERMAN, DIRECTOR OF PROCUREMENT POLICY, OASD (S. & L.); PAUL H. RILEY, DIRECTOR OF SUPPLY MANAGEMENT POLICY, OASD (S. & L.); ROBERT C. MOOT, OASD (S. & L.); AND COL. J. R. DeLUCA, ARMED FORCES SUPPLY SUPPORT CENTER

Mr. MCGUIRE. I think that is fine, Senator. (Mr. McGuire's prepared paper follows:)

STATEMENT OF THE ASSISTANT SECRETARY OF DEFENSE (SUPPLY AND LOGISTICS) Mr. Chairman and members of the committee, I appreciate the committee's interest in the supply and service programs which are under the policy guidance of the Office of the Assistant Secretary of Defense (Supply and Logistics). We who are associated with defense logistics believe that significant advances have been made in defense policies and management techniques.

I will endeavor to outline our progress and achievements in this area and I have with me today members of the OSD staff to assist in responding to any specific questions you may have.

INVENTORY MANAGEMENT

I would like to start with the area of inventory management. Inventory management policies and programs of the Department of Defense are designed to increase the effectiveness of the military supply systems and at the same time eliminate unnecessary inventory and supply operating costs.

We believe we are achieving this dual objective of effectiveness and economy by progressively integrating logistics operations throughout the Department. In achieving these objectives, certain policies have been established upon which our inventory management programs are based. These are followed wherever it is determined that more effective supply support, less total inventory, and no increase in supply operating costs will result.

Specifically, these policies are:

(a) Inventories held by the separate military services are considered assets of the Department of Defense. When these inventories are held in quantities above essential requirement levels of the individual services, they will be utilized in lieu of new procurement when and where a valid need exists anywhere in the Department.

(b) Single service management techniques or the General Services Administration are to be used for like groupings of items which are in widespread use among the services.

(c) Single service distribution of material for support of all users is to be applied in any geographical area where concentration of defense activities warrants.

(d) Advanced principles for requirements determination and advanced techniques for communication and data processing will be applied to logistics operations.

(e) In recognition of the fact that policies alone cannot achieve our objectives, we are continuing our efforts to the development of common identifications, improved supply procedures, simplification of common commercial items, and standardization of technical items.

Based on these policies, the Department of Defense has taken steps over the past several years which we believe have achieved positive results.

If you have no objection, Mr. Chairman, I will submit for the record a list of these factual accomplishments.

In order that the committee can view our progress in proper perspective, I would like to summarize for you our findings after analysis of our overall DOD activity and workload indices during fiscal year 1955 through fiscal year 1959. These indices show workload increases during this period ranging from 16 percent to 23 percent. At the same time, supply system operating costs increased only 11 percent and supply systems inventory decreased 8 percent in the same period.

In the past 2 years inventories have been reduced by $7.3 billion. Most important of all is the fact that our interservice and interagency utilization of material assets in lieu of new procurement has risen from $721 million in fiscal year 1958 to a current rate of $1.3 billion annually. We believe that this is concrete evidence of increased efficiency in our screening and utilization activity. In addition, there are inventory reductions due to single manager operations which likewise offset procurement. Other reductions resulting from disposal of obsolete material and material which is no longer economical to repair, has had a very healthy effect on our inventory posture.

COMMODITY SINGLE MANAGERS

About 3 years have passed since commodity single managers were established within the Department of Defense.

As you know, we have single-manager assignments for subsistence, medical supplies, clothing and textiles, and petroleum.

A comprehensive analysis of the single-manager concept was completed in June 1959. This review was undertaken to arrive at definite conclusions concerning the efficiency of this concept for sustained performance during times of peace and war.

The analysis revealed that significant economies have been achieved. These economies arise from

the elimination of concurrent buying and selling;

reduction of crosshauls and backhauls through integrated distribution operations;

payroll reductions;

more economical procurement operations; and

the stimulation of item reduction and standardization programs.

It was also determined that the systems are providing effective supply support and that the customers approved of the system and the support provided through the systems.

Finally, it was confirmed that the concept would be workable during peace

or war.

Our estimates indicate savings as of June 30, 1959, in the area of the four commodity single managers amounted to

1. An estimated one-time savings of $239 million resulting primarily from reduced inventory, and

2. An annual savings in personnel, storage, transportation, standardization, and inspection at the rate of about $13 million each year.

I wish to stress that these are only the identifiable savings. We feel that the nonidentifiable savings, such as decreased backhaul, elimination of competition among several military agencies in procurement, and bulk-lot procurement prices, would far exceed those we have been able to identify and document. Two new single managers have been designated. These are:

Military General Supply Agency (Army).

Military Industrial Supply Agency (Navy).

They will become progressively operational and in complete operation no later than July 1, 1961.

In addition, we have established a requirement on the Armed Forces Supply Support Center and the military departments to review and submit recommendations on single managership for general use items in the categories of construction supplies and automotive supplies. Special attention is being given to expedite accomplishment of the review which will permit a decision with respect to the future management of these categories of supply items. The review will be completed by early spring of this year.

COORDINATED PROCUREMENT PROGRAM

Under the DOD coordinated procurement program we presently have 64 plant assignments and 39 commodity assignments through which we coordinate the procurement of items in the majority of the Federal supply classes which comprise the DOD system.

Under these assignments, one Department serves as the procuring agency for all other Departments. Although this procurement arrangement is less comprehensive than the single manager plan, it nevertheless is an important part of our total effort to integrate logistics functions.

During the past year, we have devoted considerable time and effort toward reenergizing and improving the scope and efficiency of this program. We have created new single department procurement assignments for electronic equipment, on a parent-user basis, and for common electron tubes. In addition we are broadening certain existing procurement assignments by agreement with the military departments to make several Federal supply classes of material complete rather than partial assignments and thereby increase the consolidated procurement potential.

SURPLUS DISPOSAL

The value of military equipment in use which must be supported through our logistics systems as of June 30, 1959, amounted to $63.6 billion. This figure represents the acquisition cost of our capital equipment including ships, aircraft, combat vehicles, trucks, tractors, and major operating equipment of all types. Over a period of time, this capital operating equipment either wears out from use or becomes obsolescent due to technological advances. No one can predict at what rate obsolescence will take place for military equipment. On the other hand, we do have prescribed methods to determine when commercial-type operating equipment should be disposed of as no longer economical to repair. This combination of obsolescence and wear-out factors is a major source of property entering the surplus disposal program. For the purpose of planning our future efforts, we make the assumption that 10 percent, or $6.4 billion, of this equipment will be subject to disposal each year.

In addition to the disposal of capital equipment, there are other sources of surplus property. A significant portion of our supply-system inventory consists of repair parts, components, and assemblies which are repaired after use and reissued when required. Such material does, of course, reach the point when its condition no longer warrants repair, and at this stage it enters the surplus disposal program.

Supply-system inventories are also disposed of for other reasons such as damage or deterioration. Further, the sheer magnitude of our operations is such that we, just as is the case in the best of our industrial concerns, do make mistakes in predicting requirements.

Our supply-system inventories as of June 30, 1959, were valued at $46.8 billion. The total of $46.8 billion consists of $44.5 billion of material in the system and $2.3 billion of supply-system inventory awaiting disposal. Included in this total is property with an acquision value of $9.5 billion which is in an excess or surplus category. This total represents the immediate source of property from the supply system which will enter the disposal program. We have been making an intensive drive to clean out inventories by utilization and disposal. Successful action in this program results in reduced procurement costs in reduced storage costs.

We expect that, for the next 2 years at least, the volume of property entering the disposal program from the capital-equipment and supply-system sources will approximate $10 billion annually priced at acquisition cost. To enable this committee to evaluate the effect of this program, I am providing at this point a breakdown of the total DOD disposal program for the last 2 fiscal years. Total utilization and disposal program (at acquisition cost)

When property is utilized under this program and new procurement is curtailed as a result, the best possible return is achieved by the Government. The sharp increase in the utilization rate is evidence that our programs are progressing in the right direction.

We have just revised and improved our utilization screening procedures, and we are confident that the rate of utilization will continue to increase as the new procedures become effective.

An intensive review of our system for selling surplus property has just been completed. We are consolidating the current 315 sales offices into 35 interservice sales offices which will be located in key market centers throughout the country. These offices will sell all DOD surplus property within their prescribed geographical regions.

There are many advantages in this revised system:

Multiple, unsynchronized sales within any area will be eliminated.
Uniform and improved sales techniques will be used.

Personnel and facilities will be consolidated.

The opportunity for much wider buyer participation will be increased. A single sales information office will be established to which prospective buyers of DOD surplus property can address inquiries and receive information on the surplus disposal program. This office will maintain a national bidders' list and will prepare and distribute sales catalogs for all selling activities in the United States. The Air Force has been operating a central office on a limited scale for several years; therefore, the assignment of these functions on a DOD-wide scale has been made to that service. These changes will result in reduced cost as well as improved sales relations with the buying public.