Review of Selected Operations at Joliet Army Ammunition Plant

Published by the Government Accountability Office on 1971-04-22.

Below is a raw (and likely hideous) rendition of the original report. (PDF)

    Review Of Selected Operations At
    Joliet Army Ammunition Plant   8-159896




                Dear Mr. Secretary:

                         The General Accounting Office recently            completed a review of
               I o~~~~o,ns at_the.Joliet         Army Ammunition Plant (J&II'),           Joliet,        v. /WY
                 Illinois,      a Government-owned      installation     operated by Uniroyal,         Inc.,
                 under cost-plus-fixed-fee         contract DA-11-173-AMC-62(A).            The Army @.)(1d/
              $Ammunition        Procurement and Supply Agency (APSA) has management
                 responsibility       for the activities        of JaP'and    is also a tenant
                 activity     at JAAP. Contract -62(A) is administered              by the Commanding
                 Officer    of JAAP, who also acts,as the Contracting             Officer's       Repre-
                 sentative      (COR).

                        During our review,we          identified        several aspects of Uniroyal's
                operations       where costs could be reduced by as much as $615,000
                annually.        These were: 411 the use of economic order quantity
                techniques       in managing the maintenance,                repair and operations
                inventory;       and, (2) better utilization               or elimination     of certain
          t     indirect      labor, namely, warehousemen, laundry operators,                       fire-
          i     fighters     and medical personnel.               Uniroyal      was in general agreement
                with our observations,           revising       its procedures to include the
                application        of economic order quantity              techniques     and initiating
                action to improve the utilization                  of warehousemen and laundry
                operators.        with respect to the firefighters                 and medical personnel,
                the contractor         indicated    that further         review would be made and
                appropriate        corrective    actions taken.

                       We identified     other areas where annual operating         costs could
                possibly be reduced significantly.            These included     (1) motor pool
                operations,      (2) operation     of oleum producing facilities,      and
                (3) funding of capital         items.    These matters were discussed with
                APSA officials       and their comments are noted below, as appropriate.

                BOTENTIAL SAVINGS IN

                       At the time  of our review, both the COR and Uniroyal   motor
                pools were providing    on-call   chauffeur service to O'Hare Lnterna-
                tional   Airport,  about 65 miles from JAAP. 'Pick-up and delivery

                                          50 TH ANNIVERSARY         4921-   1971
  points which could be at JAAI?, a local motel or at the travelers
  residences,   as well as the time of pick-up, are at the discretion
  of the travelers.

          Commercial limousine service between Joliet  and O'Hare is
  limited    to two round trips daily except weekends.   It appears that
  the present commercial service may not be adequate for &zcommodating
  APSI travelers.

          Based on our analysis of data available,            it appears that
  significant      savings may be realized,       with Little     or no degradation
  in service to travelers,         if a scheduled vehicle        service were to be
  substituted      for the on-call     service now being provided.         Records
  were not available        showing the total annual mileage driven between
  JAAl? and O'Hare but, based on tests of available               data for selected
  periods,     we projected     the mileage at about 500,000 annually.           AI?%
  has estimated that the cost of the chauffeur              service at about
  38-3/4 cents a mile; therefore,            we estimated the total cost of the
. on-call     chauffeur   service to O'Hare approximates          $194,000 a year.

         tJe believe    that the use of sedans on a scheduled basis, with
  reimbursements      for local travel     to specified       pickup points, would
  result in satisfactory        service for routine       travel     requirements     at
  substantially      reduced costs.      For example,     five    round    trips  a  day,
  7 days a week would cos t about $37,000 annually or about $157,000
  less than the on-call        chauffeur   service.      This savings would be
  reduced somewhat by the cost of travel             (taxi or privately-owned
  vehicles)     to and from pickup points.          Also, when necessary,         the
  service could be supplemented by available              commercial limousine

         We discussed our findings   with fZSA officials and they subse-
  quently conducted a study from which they concluded that the cost
  of commercial service     exceeded the cost of the JAAF on-call  chauffeur
  service.      The APSA study, based on selected trips made during June,
  July, and August 1970, is summarized below, followed     by our evaluation.

            Cost of commercial          service

                     Transportation      fares (including          taxi-cab
                        fares to pick-up/delivery            points)              $18,700a
                     Increased      lost productive       time and per
                        diem (in excess of costs of using on-
                        call chauffeur       service)                              25,700
                              Total commercial service                             44,400
                     Cost of JAAP on-call          chauffeur     service           34,700
                              Cost of commercial service              in excess
                                  of on-call     chauffeur     service            $ 9,700

aIncludes          cost of taxicab between residence and
 airport      if     limousine   service was not convenient.
          Based on this study of the cost of commercial service,    APSA
   concluded that it was not economically     practical for JaAP to
   provide   its own regularly  scheduled service.

          We believe     that APSA overestimated     the overall cost of commer-
   cial service and did not adequately          consider the economies of
   providing    regularly     scheduled service supplemented by commercial
   service.    Furthermore,       in its study -

           --@SA overestimated   the per mile cost of taxi              fares;   as a
              result, the cost of commercial transportation              fares
             were overestimated  by $3,600.

           --APSA estimated the cost of additional       lost productive  time
              and per diem on the assumption that under the JAAP chauffeur
              service all travel    began and terminated    at times that held
              these costs to the absolute minimum. This assumption,
              however, was not realistic.     For example, we noted that only
              8 percent of the trips to O'Hare included in the &PSA study
              originated  on the JAAP post; the remaining 92 percent
              originated  off-post,   usually at the residence of the travelers,
              indicating  that the travelers   were not engaged in productive
              work at the time their travel    began.

   Conclusion       and recommendation

           We believe     that the costs of transporting         travelers   to Q'Hare
   Airport    may be significantly        reduced by replacing       the on-call     chauffeur
   service with regularly         scheduled service       supplemented by commercial
   limousine     service,     if necessary.      Unlike commercial transportation
   (the only alternative         considered by APSA in its study),          regularly
   scheduled service by JAAP would be controlled                by APSA and could be
   scheduled during predominate           travel   times.

          In view of the results of our limited     review,    and the limitations
    of the APSA study, we recommend that the Secretary         direct APSA to      &.u
/reexamine      the feasibility of providing  regular     schedule service      to
    O'Hare instead of the on-call   chauffeur   service.


            As   directed    by the Army, Uniroyal    purchases oleum, a chemical
   used in       the manufacture     of TNI, from Wilson Pharmaceutical       and
   Chemical       Corporation    under a negotiated    cost-plus-fixed-fee       sub-
   contract.         Wilson produced the oleum in Government-owned         facilities
    located      within the JAAP complex and adjacent to acid producing
   facilities        operated by Uniroyal,      Wilson also sells spent acid from


the Uniroyal    manufacturing  process in          return for a portion     of the
net profits   from those sales.       On the       basis of 1970 requirements,
we estimated that the overall      cost of         TNT production    at JAAP can
be reduced by over $400,000 annually             if the Secretary     of the Army
would terminate     the lease with Wilson        ) permit Uniroyal     to operate
the presently    leased oleum facilities,            and if Uniroyal   marketed
its own spent acid,

Leased oleum facilities

     The Department of the Army leased the three oleum producing
units to a commercial chemical company in 1959, when the facilities
were in standby,,  In 1962, the lessee advised the Army that it
could no longer carry on operations   and the parties terminated
the lease.

       In March 1964, Wilson and the Army (Corps of Engineers1
executed a lease for the oleum units.          The lease provided      that
Wilson was to operate one unit for commercial production             of
sulphuric    acid and maintain two units in standby.        The parties
agreed to a lease,period      of 5 years effective     September 15, 1964.
The agreement provided Wilson with an option to renew the lease
for three successive 5-year periods and, in 1969, Wilson exerc,ised
its option for an additional      5 years.     The lease, and the provisions
of 10 U.S. C. 2667 (b)(3)      and (4) permit the Secretary of the Army
to terminate     the agreement by giving 30 days written       notice to the
 lessee.   The terms of the contract     between Uniroyal     and Wilson (see
below) also permit termination      whenever the contracting       officer
under the prime contract determines        that such action is in the best
interests    of the Government.

Army directed     purchase    of oleum

         In 1965, Uniroyal      indicated   an interest      in operating     the leased
facilities     to produce oleum needed for the production                 of TNT and
APSA considered       terminating      the lease with Wilson.         In lieu of
terminating,     however, the Army directed          Uniroyal     to purchase oleum
from Wilson to the extent of the latter's               production      capacity.
Uniroyal     and Wilson negotiated        a CPFF subcontract        which provided
that Wilson would sell its oleum production                to Uniroyal      and would
market spent acid for Uniroyal.             The current subcontract          specifies
fees to Wilson of $0.50 a ton for delivered                oleum and 25 percent
of the net profit        from sales of spent acid.          Additionally,       Wilson's
reimbursed operating         costs include fire insurance premiums which
amounted to about $14,200 annually.              The insurance premiums, fees
on delivered      oleum, and profit       on acid sales are ultimately            charged
to the Government under the CPFF prime contract                 -62(A).

New facilities

         As part of a plant modernization       program, Uniroyal  had submitted
proposals for construction          of two new oleum and sulphuric    acid
producing plants.         On June 30, 1970, the Army awarded a contract      for
construction       of the first    of the two plants which will be operated
by Uniroyal.        These will eventually    replace the older inefficient
facilities      presently   operated by Wilson.

       During our review, Uniroyal            officials indicated    that they were
still   interested      in operating     the oleum producing facilities       leased
to Wilson.      Uniroyal      officials    stated that the capacity of the
new plant, which is expected to be operational                in June 1972, will
not be sufficient         to provide enough oleum to satisfy         expected maximum
TNT requirements.          Therefore,    until a second plant is constructed         and
operational,      Uniroyal     will continue to purchase oleum from Wilson
under the existing          subcontract.

       At the time of our review, we estimated that, on the basis of
1970 oleum requirements,      JAAP operating     costs could be reduced by as
much as $467,000 annually      if Uniroyal     operated the JAti oleum faci-
lities    during the modernization    period.      The estimated savings in
operating     costs consisted of the Wilson share of net profits        from
the sale of spent acid ($323,500),         Wilson fees on oleum ($129,300)
and reimbursements     for the cost of fire insurance premiums included
in Wilson's costs ($14,200).       The cost of administering      the lease
agreement and the subcontract      with Wilson would also be eliminated.

         In response to our inquiry,      APSA stated that it would not attempt
to alter the existing        arrangement.     ABA pointed out that new oleum
facilities      were planned for JAM? and Uniroyal       would require   a decreasing
quantity      of oleum from Wilson through 1973. APSA further          commented
that it believed       that the Uniroyal    fees plus its cost of a sales force
and developing       a market for the spent acid would equal or exceed the
Wilson fee.

Conclusions      and recommendations

       The current lease agreement with Wilson was negotiated           on the
basis of utilization     of the facilities     for commercial production      of
sulphuric    acid rather than for the production         of oleum.   When
Uniroyal    expressed an interest     in the facilities,      in 1965, Wilson
offered   to produce the oleum.

     The production   of oleum for TNT, however, is an integral       part
of the explosives   manufacturing  operations     now managed by Uniroyal.
It would therefore   appear that, from the standpoint      of both effective
management and reduced costs, Uniroyal       should be operating   the oleum

facilities,   Furthermore,  upon completion of the new oleum production
facilities  in June 1972, there will be two contractors    producing the
same product (oleum) at the same location   unless Wlson's     lease is

       Operating     the old oleum facilities          would be a relatively       minor
expansion of the Uniroyal          management of JAAP. The Uniroyal            fee is
paid primarily       on the basis of the quantity           of end products accepted,
not on the quantity        of ingredients     manufactured.         Therefore,   in our
opinion,    transfer     of operating    responsibilities         should not result in
a significant      increase in fees to Uniroyal.             Also, it appears to us
that Uniroyal      should be able to effectively            develop markets for spent
acid since it is in the chemical industry.

      We recommend that the Secretary of the Army review the present
contractual   arrangement for producing oleum and consider our findings
along with the future operating       potential   of JAAP. Further,    in the
absence of any compelling      reasons to continue the current arrangement,
and, if appropriate,     we recommend that the Secretary      consider termi-
nation of the lease agreement &th Wilson and permit Uniroyal             to
assume responsibility     for operating    the old oleum facilities.


        During our review we noted several instances in which funding
restrictions    had been instrumental  in preventing  Uniroyal     from
making capital    improvements that were economically   justified.

      Since 1966, Uniroyal    has leased trailer     complexes for use
as administrative     offices and employee change-house locker facilities.
The trailers     were leased under contracts    which permitted   a portion of
the rental payments to be applied toward purchase of the trailers.

      Our review disclosed      that it was economically    advantageous   to
purchase the trailers     rather than to aontinue paying rentals.         For
example, the rentals     paid for one complex had exceeded the purchase
price by $4,800.      In another instance,   an expenditure     of $ll,SOO
to purchase trailers     would have eliminated   future rental costs of
about $20,000 annually.

      We also noted that the Defense Contract Audit Agency (DCAA)
issued two reports    in February 1969, stating that the installation
of modern laundry equipment and automatic car wash equipment could
reduce operating    costs by about $267,000 annually.   In both instances,
DCAA stated that savings would begin to be realized     during the first
year of operations.

       Uniroyal    officials and the COR agreed that purchasing       the trailers,
the laundry equipment and automatic car wash equipment would reduce
operating     costs, but that funding restrictions      had precluded procure-
ment. They stated that the trailers       are considered     to be real prop-
erty, and since funds for acquisition       of real property      are limited,
they have been unable to obtain approval         to procure the trailers.

       after receiving      the'DCAA reports,  Uniroyal  requested funds for
purchasing     laundry and automatic car wash equipment, but in September
 1969, ABA returned       the requests stating previously     approved purchases
of other equipment would have to be withdrawn before the requests for
the laundry equipment and automatic car wash equipment could be
considered.       New requests had not been submitted at the time of our
review;     however, Uniroyal     personnel and the COR stated that revised
requests for funds would be submitted.

Conclusions     and recommendation

        In our opinion,    investment    decisions   should be based primarily
on the ability      to recover costs and realize       future    savings,    not
on the technicalities        of funding procedures.       We  believe     it would
have been economically        advantageous    to approve the purchase of the
trailers,     laundry equipment and automatic car wash.

      We, therefore,     recommend that the Secretary    take action        to
permit capital     improvements when they result    in the reduction         of
current operating      costs and the rapid recovery of investment.

      We would appreciate your views on the matters presented in this
report as well as advice as to any actions taken or contemplated  by
the Department on the matters discussed.
      Copies of this letter   are being sent to the Commanding General,
Army Materiel  Command, and the Regional Manager of the Defense Contract
Audit Agency, Chicago, Illinois.

                                                            Sincerely   yours,


The Honorable
The Secretary    of the Army