Purchasing Performance: A Public Versus Private Sector Comparison Of Commodity Buying - spending efficiency of Department of Defense

Acquisition Review Quarterly, Fall, 1999 by MaJ Joseph Besselman, Ashish Arora, Patrick Larkey

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

Purported failures in purchasing and acquisition are an important basis for the general public's beliefs that the Department of Defense (DoD) makes inefficient use of tax dollars. A widely publicized string of stories over the past several decades has given the public ample material to compare with private sector purchasing, and to conclude that DoD has been reckless with public money.

We set out to test the validity of the public's beliefs about the DoD by comparing the efficiency of defense purchasing with that of the commercial sector. This research compares the purchases of identical commodities drawn from

electrical, engine, and software sectors. The comparisons consider the price of a good, purchase quantity, relevant contextual information, and DoD's direct buying costs.

The main research questions were:

* What are the differences in buying performance between the commercial and DoD sectors?

* What causes the differences?

* Is there systematic evidence to support the public's beliefs?

The samples of purchases consist of more than 831,000 items purchased as part of 693 actual contracts or delivery orders valued at $99.9 million to DoD. Among the findings, based on samples of purchases of identical commodities vastly larger than any sample in the literature and improved comparison methodologies, are, first, that DoD pays 41.5 percent less than the average commercial sector organization purchasing the commodities included in the samples. In addition, superior DoD buying performance holds even when considering DoD's direct buying and oversight costs.

PUBLIC PERCEPTION AND PAST RESEARCH

Students of defense procurement, as well as the typical citizen who occasionally reads a newspaper or watches the evening news, agree on one thing: The DoD is an inept buyer of goods and services. Thompson (1992-93), for example, observes the conventional wisdom holds that DoD buying is riddled with fraud and abuse, with overcharging, payroll padding, misappropriation of government property, bribery, kickbacks, and conflicts of interest as commonplace occurrences. The media, and to a much lesser extent the academic literature, have provided many examples fostering these beliefs: $436 hammers (Comeau, 1984), jet engines purchased by DoD without warranty at a price 20 percent higher than the same commercial sector engines under warranty (Rich and Janos, 1994), $7,000 videotape recorders (Gansler, 1978), $7,600 coffee pots, and $9,600 allen wrenches (Comeau, 1984).

So prevalent are these views that DoD's inspector general, Eleanor Hill, said she would eliminate the buying of $436 hammers during her August 28, 1995, swearing-in ceremony, more than 10 years after the hammer purchase made newspaper headlines across the country. Although these examples relate to defense procurement, Downs and Larkey (1986) showed more generally that people believe the U.S. government is inefficient, ineffective, wasteful, and venal, and that its employees are overpaid and underworked.

The belief that DoD is an inept or corrupt buyer rests on a fragile bed of anecdotal evidence. No systematic studies have been performed comparing the buying performance between the defense and commercial sectors using a large sample of purchases of identical commodities. It is unclear whether the aforementioned anecdotes are the rule or exceptions, or whether extenuating circumstances exist to explain the differences in price paid for goods.

Typically, the literature has employed anecdotes focusing only on differences in price while ignoring purchase volumes, representativeness of a purchase, comparability, contextual information surrounding a purchase, or allegedly costly DoD oversight and procurement practices (Mandel, 1977; Michelli, 1977; Angier, White, and Horowitz, 1979; Stimson and Barnett, 1980; Gansler, 1982; Comeau, 1984; Stewart, 1986; "DoD's Inadequate Use" [Senate report 101-62], 1989; the Center for Strategic and International Studies (CSIS), 1991; and Coopers & Lybrand/ASC, 1994). A fuller critical review of this literature is given by Besselman (1998).

The Coopers & Lybrand/TASC study (1994), commissioned by former Secretary of Defense William Perry as one basis for commercialization reforms, is a recent, important example of the sort of anecdotal research in this area. This study focused on the costs to the government in purchasing and oversight. This directed search for possible savings in purchasing and oversight concluded that:

* the average DoD regulatory cost premium of 18 percent of value-added costs;