BREAKOUT PROCEDURES To obtain the component elements of our ships, missiles, and other major end items, there are three basis approaches we may take. First, we can permit the contractor to "make" certain components, reviewing his cost data to insure reasonableness of cost. Second, we can allow the contractor to "buy" certain components from subcontractors, after carefully reviewing his "make or buy" plans to determine their effect on price, quality, delivery, and performance and examining his purchasing system to insure that adequate competition is obtained. Third, we can "break out" from our large complex system procurements those components and subsystems which, without affecting the technical integrity of the parent system, we may purchase through competitive means from a number of sources; items so purchased are then provided to the prime contractor as Government-furnished material. In each procurement we try to use whatever combination of these three approaches which is in the best interest of the Government. We use the term "breakout" to designate the technique whereby we buy certain components and furnish them to the prime contractor for incorporation in the end item. We use this breakdown technique not only to develop competition but also to broaden our industrial base and bring about economies in both time and costs. Purchases by breakout frequently result in better prices and earlier deliveries. They also serve to increase the opportunities for greater participation by small business firms in our procurement program. Here are several illustrative examples of our application of the breakout procedure during 1959 and the apparent savings realized as a result of competitive procurement. There are three items listed: Item Rolleron-type wing assemblies for sidewinder missile motor_ Apparent savings $141, 000 146, 000 384, 000 Wherever the selective application of this procurement technique will bring about improvement in price or quality, or will aid small business without sacrifice of price or quality, we will continue to insist on its use. DRAWINGS AND SPECIFICATIONS Another important means of increasing competition in our procurement programs is to insure the timely acquisitions of drawings and other technical data which will serve as a basis for competitive procurement. The Office of Naval Material recently conducted a comprehensive navywide study of the existing policies and procedures concerning the acquisition, control and use of drawings and technical data, particular effort was made to investigate new procedures which would insure the earlier availability of drawings and technical data for competitive procurement purposes. A report containing the results of the Navy study has been provided by the Chief of Naval Material to the chiefs of the major purchasing bureaus, along with instructions to implement its applicable recommendations. As a result of this report and the significant recommendations made therein, increased availability of drawings for procurement is expected, which in turn will result in increased competition. VALUE ENGINEERING A procurement technique which we have employed with considerable success, particularly in the shipbuilding programs, and one which holds promise as a means of reducing the prices of some of our major weapons, is value engineering. Value engineering involves a review of the elements of design, engineering, manufacturing processes, and material which go into an end item, in order to determine whether the item can be made to perform the same function at a lesser overall cost. To encourage value engineering efforts-hence cost reduction-by our contractors, we have developed incentive provisions for incorporation in selected contracts. These provisions provide that the contractor will maintain a value engineering staff whose efforts will be devoted during performance of the contract to the development of cost-reduction recommendations with respect to the items being produced. These recommendations with respect to the items, are then submitted to the Navy and if adopted, the contract prices are reduced by an amount which will permit the contractor to share in the resultant savings. Illustrative of the savings possible through the application of value engineering was that achieved by the adoption of a proposal to revise the method of welding the "stuffing tubes" through which electric cables penetrate watertight bulkheads and decks aboard ship. Simplification of this single process has reduced shipbuilding and repair costs by $4.8 million per year. Additional examples of cost reduction through value engineering are included in appendix A, which has been furnished along with this statement. Our experience to date in the use of this technique, though limited, is encouraging, and we will continue to follow its development with great interest and a view to its possible expansion into additional areas of our procurement program. PROCUREMENT TRAINING We have stepped up and expanded significantly the Navy's procurement training program during the past 2 years. Supplementing the training, both formal and informal, which is conducted by our major procuring activities, the Office of Naval Material has assumed an increasing share of the responsibility for the conduct of navywide training in all aspects of Government procurement. In past years courses in contract administration, contract termination, and negotiation and pricing techniques have been conducted from time to time by the Office of Naval Material. Last year, an advanced Navy procurement course, covering such matters as procurement policies, procedures, regulations, and legal requirements, was added. This course was attended by approximately 100 of the Navy's top civilian and military procurement personnel. Presently underway is a Navy procurement course modeled after the advanced procurement course but developed expressly for the intermediate levels of procurement personnel. It is planned that more than 250 military and civilians will have completed this course by the end of this year. A third course will commence in May especially designed for technical personnel of the Navy, in which they will be given instruction in procurement policies, procedures, regulations, and laws as they relate to their responsibilities. This training is expected to assist us in the solution of the many daily problems jointly shared by technical and contracting personnel. Commencing in July of this year will be a new Navy price analysis course in which specific training will be provided in the techniques of analyzing contractors' prime costs, bills of material, subcontracting costs, and related matters. The primary objective of this course will be to improve the skills of our negotiators in applying the many techniques required to assure close pricing in our contracts. Finally, a Navy property administration course designed to instruct Navy personnel in the administration of Government property in the possession of defense contractors will also get underway in the first quarter of fiscal year 1961. Approximately 1,000 of our procurement personnel will have completed the current and planned courses by the end of this year. In addition to the foregoing, during 1959 the Office of Naval Material conducted a series of seminars for procurement personnel in the Washington area. Personnel attending represented Navy procurement organizations responsible for the bulk of the Navy's procurement dollars. The subjects of these seminars included such timely topics as subcontract analysis, analysis of bills of materials, utilization of Navy auditors in pricing, and the recently revised contract cost principles. Before leaving the subject of training, I would like to mention a recent major accomplishment involving one of our more important training media, the publication "Navy Contract Law" issued by the Navy's Office of the General Counsel. This book has just been completely revised and brought up to date. In addition to use by Government personnel, it is available at modest cost to the public through the Government Printing Office so that contractors and their lawyers may better understand what is involved and required when a contract is executed with the Government. I commend this document to all individuals, in or out of the Government, who are concerned with the legal and practical aspects of Navy procurement. THE NAVY PROCUREMENT DIRECTIVES (NPD) The many recent improvements to the Armed Services Procurement Regulations have been discussed fully by Mr. Le Boutillier. To the extent implementation of the ASPR is necessary, or guidance in procurement areas not covered by the ASPR is required, we issue departmental procurement regulations in the form of Navy Procurement Directives (NPD). Last year a revised and greatly improved edition of the NPD was published. The content was rearranged and numbered to conform to the ASPR, and all material which duplicated that contained in the ASPR was removed. As a result, use of this document by our procurement personnel has been greatly facilitated and its size reduced by more than one-third. COST PRINCIPLES The matter of cost principles and their application under costreimbursement-type contracts is of particular concern to the Navy. In view of the fact that approximately 30 percent of our procurement dollars are placed under cost-type contracts, it is of the utmost importance that these cost principles are completely understood and properly applied by our negotiation and audit personnel. In his presentation, the Deputy Assistant Secretary of Defense for Supply and Logistics discussed in considerable detail the new revised set of cost principles which were issued in the ASPR on November 2, 1959. Following receipt of additional guidance from the Department of Defense, the Office of Naval Material issued an instruction on February 17, 1960, which implemented this guidance and provided detailed information on the use of the new cost principles in the Navy. Pending the issuance of this instruction we held two seminars dealing specifically with the new principles, their interpretation, their differences from the previous cost principles contained in the ASPR, and their intended application. Each of these seminars was attended by approximately 300 Navy procurement personnel, including negotiators, located in the Washington area and representing the major buying offices of the Navy. As soon as additional experience is gained under the revised cost principles, we intend to hold other seminars, not only with personnel in the Washington area but with field personnel as well. The purpose of these seminars will be to exchange experience and to assure uniformity in the interpretation and application of the revised cost principles. CONCLUSION Mr. Chairman, I have described to you various steps we have taken and techniques we have developed which were designed to achieve reasonable costs, prices, and profits in our procurement. Although the evidence we have been able to assemble indicates to us that a creditable pricing job is being done by the Navy, this is not to say we are satisfied. Further improvements can be made and we are actively seeking to bring them about. We are refining our negotiation and pricing techniques. We are reviewing our procurement operations to discover and correct any deficiencies which may exist. We are training our procurement personnel to develop their greatest potential. Let me again express my appreciation for the opportunity to appear before this committee to describe the Navy's efforts to improve its procurement policies and procedures. APPENDIX A EXAMPLES OF VALUE ENGINEERING UNDERWATER EXPLOSIVE DEVICE In fiscal year 1956, this $28 item was originally designed and produced as a practice depth charge in accordance with detailed plans and specifications. This device was subsequently incorporated as a vital part of an ASW system which greatly increased the annual procurement requirements. Concerted cost reduction efforts to meet these requirements led to the preparation of a general per formance specification and a subsequent unit cost of $3.59 under a fixed-price contract. Cost reduction realized on the lastest fiscal year 1959 procurement is $403,000. We expect to buy several hundred thousand units in the future. On each hundred thousand the reduction is $2 million. SIMPLIFIED ELECTRICAL CONNECTIONS Electrical connections (taps) from powerlines for lighting fixtures, small motors, and low-power appliances have been made by fastening lugs to the wires, and in turn fastening the lugs to terminal strips installed in the connection boxes. This method was used in both commercial and military systems because of external forces such as shock and vibration. A new "twist-on" connector was found and approved that resists all such external forces. It utilizes a plastic, removable and reusable "wrap cover" to permit necessary electrical inspection. Use of this connector eliminates the need for the terminal strip and at least 50 percent of the lugs. Average cost of installed connections: Before__. After.. Net cost reduction per connection__‒‒‒ Cost reduction per year (Navy annual usage, 84,000)_. 5-inch, 54-caliber gun mounts $5.54 .80 4.74 400, 000 Analysis of the original requirements for local control against aircraft and surface targets eliminated an $18,000 telescope from each of these gun mounts. In the cost of recent deliveries, this achieved a total reduction of $684,000. ELECTRIC STUD WELDING TO INSTALL DAMPING MATERIALS To meet the requirement for quieter submarine operation, damping materials are installed against the inside of submarine hulls. Past practice was to attach the studs to the hull by adhesives. New welding techniques, eliminating undesirable effects on the hull steel, were found and approved. In Polaris and other nuclear submarines, these have resulted in a cost reduction for welding of approximately 60 percent. Cost before (per submarine). Cost after (per submarine). Net cost reduction (per submarine) - Cost reduction on submarines now building or authorized TORPEDO TUBE MK-32 $90,000 40,000 50,000 400, 000 Eleven value engineering changes, ranging from $1.75 to $362 per change, reduced the unit cost by $1,152 on this triple-barreled tube for surface ships. This is a 9-percent reduction based on the original cost of $13,000 per tube. Attendant benefits include the elimination of approximately 300 parts, which contributed to improved reliability and simplified maintenance. The cost of the value engineering was $27,000. On current production orders, these changes produced a cost reduction of $291,000. On the total planned procurement of 900 tubes for approved ship programs, we expect a cost reduction of $1,035,000. WELDING REDUCTION IN ELECTRIC CABLE INSTALLATION Shipboard electric cables must penetrate many watertight bulkheads and decks. Where they penetrate, "stuffing tubes" are installed to permit sealing the penetration in order to maintain the watertight compartmentation. These metal stuffing tubes on both commercial and naval ships have been required to be welded to both sides of the penetrated bulkhead or deck. The weld on one side of the penetration was eliminated, and consequently the welding costs were reduced by 50 percent. |