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

Two case studies from the engine and software commodity sectors considered all DoD purchasing costs and assumed the commercial sector's buying costs were zero. Despite this handicap, DoD outperformed the average commercial sector firm buying at commercial wholesale prices. For example, DoD paid $59.3 million for 71 engine part contracts while accruing an estimated $8.3 million in labor costs. The total cost to DoD is $67.6 million. However, if the manufacturer's best commercial customer purchased those same parts and purchased them while accruing no labor costs, they would have paid $123 million. For the software sample, DoD paid $36.4 million for the purchases constituting the sample and incurred an estimated $3.9 million in labor and contract costs to research and purchase the software commodities. The average commercial sector firm receiving wholesale prices, however, would have spent $60.5 million for the very same software products. Even when DoD's purchasing costs are considered, DoD outperforms the average commercial sector organization buying at wholesale prices.

WHAT CAUSES THE DIFFERENCES IN BUYING PERFORMANCE?

DoD's buying behavior can be compared to that of the typical American consumer: As the total dollar value of a purchase increases, so does DoD's attention and effort for getting a fair price. If the typical consumer needs only a loaf of bread or gallon of milk, he or she will more often than not purchase it at the nearest convenience store even though a grocery store offers a lower price. But if the consumer has a long list of items to buy or it is the weekly shopping trip, he or she will undoubtedly go to the local grocery store or discount warehouse for its better prices. On high-cost purchases such as automobiles, houses, and appliances, the typical consumer is more likely to thoroughly research sources and comparison shop. The DoD buyer is no different in allocating attention and effort in purchasing.

Like a typical consumer, a variety of practices are employed by DoD in order to achieve superior performance relative to the average commercial sector firm. First, DoD acts according to legislation passed to ensure that it pays no more for an item than any other commercial sector firm buying under similar circumstances, although this statute is rarely enforced. Second, for high-dollar-value purchases, most DoD buyers appear to study their suppliers, aggregate their buys, watch for sales, forecast, and negotiate aggressively with suppliers. In the software sector, studying suppliers, aggregating requirements, and waiting for sales provided deep savings; the deepest discounts were often offered by a commercial supplier at the close of a financial reporting period. Aggregating buys is one method DoD uses to exploit its buying power.

Forecasting is important if DoD expects to derive the benefits of "just in time" delivery and aggregating buys to get the greatest quantity-based price breaks. With effective forecasting, DoD can then enter into long-term contracts with a supplier to provide incremental quantities on a monthly basis over several years. This provides a win-win situation for DoD and suppliers. This is precisely how information distortion in a supply chain can be eliminated, and thus lead to the greatest efficiencies for both the supplier and customer (Lee, Padmanabhan, and Whang; 1997). With good forecasting information for the DoD buyer and his supplier complemented by long-term contracts with incremental deliveries, the supplier-customer team is managing throughput rather than speed; it is effective throughput management that minimizes cost (Fuller, O'Conor, and Rawlinson, 1993). The DoD is able to glean the benefits of a high-quantity buy while accruing savings from reduced inventory. The supplier is able to more effectivel y plan its production and minimize its inventory of raw materials. This is, however, an area ripe for process improvement across DoD, since all product lines are not effectively forecasting demands or future requirements.