oversight

Defense Logistics: New 120-mm Tank Training Round Procurement Will Result in Savings

Published by the Government Accountability Office on 1999-11-22.

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

                  United States General Accounting Office

GAO               Report to the Chairman, Committee on
                  Armed Services, U.S. Senate



November 1999
                  DEFENSE LOGISTICS

                  New 120-mm Tank
                  Training Round
                  Procurement Will
                  Result in Savings




GAO/NSIAD-00-34
United States General Accounting Office                                                          National Security and
Washington, D.C. 20548                                                                    International Affairs Division



                                    B-282830                                                                                     Leter




                                    November 22, 1999

                                    The Honorable John W. Warner
                                    Chairman, Committee on Armed Services
                                    United States Senate

                                    Dear Mr. Chairman:

                                    In March 1975, the Department of Defense designated the Army as the
                                    Single Manager for Conventional Ammunition1 with responsibility for
                                    procuring conventional ammunition common to all military services. As the
                                    single manager, the Army has relied on government-owned and private
                                    sector facilities to meet its conventional ammunition requirements.
                                    However, with the reduction in ammunition budgets and declining
                                    requirements, the Army has significantly downsized the number of
                                    government-owned plants in recent years and currently has eight plants
                                    producing ammunition. One of these is the Radford Army Ammunition
                                    Plant, which historically has produced propellant used in making
                                    ammunition.

                                    Tank training ammunition in fiscal year 1999 amounted to about
                                    $205 million, or 24 percent of the total Army conventional ammunition
                                    budget, and, therefore, has a significant impact on the ammunition
                                    production base. In 1995, faced with dramatic reductions in ammunition
                                    requirements, the Army attempted to reduce costs by awarding multiyear
                                    firm fixed-price contracts covering fiscal years 1995 through 1998 for the
                                    production of 120-mm tank training rounds to two contractors, Alliant
                                    Techsystems and Primex Technologies. In addition, a 1993 study of the
                                    propellant production base showed that Radford’s ability to compete for
                                    propellant business was declining and the Army needed Radford for its
                                    wartime replenishment mission2 for propellant. Therefore, both
                                    contractors were required to purchase the training round propellant from
                                    Radford. In 1999, the Army entered into new contracts for tank training


                                    1
                                      Conventional ammunition includes artillery, bombs, demolition material, fuzes, grenades,
                                    mines, mortars, propellant charges, pyrotechnics, unguided rockets, small arms, and tank
                                    training ammunition.
                                    2
                                     Replenishment means replacing ammunition losses after a conflict in accordance with
                                    defense planning guidance.




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                   B-282830




                   rounds with the two contractors covering fiscal years 1999 through 2003.
                   Because the Army believed that Radford’s industrial capability no longer
                   required special protection, it allowed the contractors to purchase
                   propellant competitively. As a consequence, one contractor chose to
                   purchase propellant from a private company.

                   As requested, we determined whether the Army’s actions in 1999 resulted
                   in savings on the purchase of 120-mm tank training rounds, the effect the
                   Army’s decision to no longer direct that propellant be purchased from
                   Radford had on plant overhead and employment, and the potential effect
                   on Radford’s wartime replenishment mission.



Results in Brief   The Army could achieve about $52 million in savings over a 5-year period
                   from its 1999 contracts for the procurement of 120-mm tank training
                   rounds if all contract options are exercised. The Army expects to achieve
                   the savings based on a negotiated decrease in price per round from the
                   1995 to the 1999 multiyear contracts. However, a decision by one of the
                   contractors to use a propellant producer other than Radford resulted in a
                   50-percent reduction in Radford’s propellant business for the tank training
                   round program.

                   To absorb increased overhead costs due to the loss of business, the
                   operating contractor at Radford negotiated price increases for propellant
                   with the Army for two new contracts totaling at least $14 million. Another
                   result of the Army’s decision to no longer direct that propellant be
                   purchased from Radford was that the contractor reduced its workforce at
                   Radford of 1,200 by 185 personnel. These personnel reductions required the
                   contractor to incur certain employee separation costs and affected the
                   contractor’s retirement funding liabilities. The Army recognized that the
                   1999 multiyear contracts could affect Radford’s operations but believed the
                   impact would be minimized because Radford was in a competitive position
                   to win other Department of Defense contracts.

                   The loss of propellant work does not affect Radford’s ability to meet its
                   wartime replenishment mission. Radford’s facilities have the capacity to
                   produce about 100 million pounds of propellant per year but currently are
                   only producing 10 million pounds per year. With additional personnel, this
                   provides more than adequate capacity for Radford to meet its
                   replenishment requirements. Radford officials stated that as long as the
                   propellant lines are operating, they would be able to replenish propellant in




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             accordance with requirements contained in current Defense Planning
             Guidance.



Background   The Radford Army Ammunition Plant, located in Radford, Virginia, is the
             Army’s only government-owned, contractor-operated propellant production
             facility. Since 1994, the Army has contracted with Alliant Techsystems to
             operate Radford as the facility use contractor.3 Radford is currently capable
             of producing a variety of propellants used in Department of Defense
             ammunition products such as the 120-mm tank training and tank tactical
             rounds and the Hydra-70 rocket.

             Since 1987, the Army has procured its 120-mm tank training rounds from
             two prime contractors, Alliant Techsystems (formerly Honeywell) and
             General Defense (subsequently bought by Olin). The two contractors were
             responsible for choosing their subcontractors and obtaining all
             components. The contracts for fiscal year 1988 provided for a 70-percent/
             30-percent split between the contractors, with the larger share going to the
             lowest offeror. From 1988 through 1994, contracts were awarded annually
             on a cost-plus basis. In 1993, to reduce costs, the Army decided to award
             multiyear firm fixed-price contracts for the 120-mm tank training rounds.

             In 1993, with Alliant and Olin considering a merger, the Army became
             concerned that the contractors might acquire propellant from a source
             other than Radford. Based on a detailed study of the propellant production
             base, the Army determined that Radford, because of high costs, could not
             compete in an open market for tank training round propellant business, yet
             the facility could not remain viable without this business. Therefore, the
             Army, in awarding the first in a series of multiyear contracts for 120-mm
             tank training rounds for fiscal years 1995 through 1998, required that the
             prime contractors, Alliant and Olin, 4 purchase propellant for the training
             rounds from Radford.




             3
               The facility use contract provides for Alliant’s use of Radford facilities to complete work
             for government as well as commercial customers, subcontract work, and foreign sales.
             4
              Olin subsequently spun off its Ordnance and Aerospace Divisions, which became Primex
             Technologies.




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                              In 1997, the Army began developing its tank training round acquisition
                              strategy for fiscal years 1999 through 2003. Under this strategy, the Army
                              believed that Radford could now compete in the open market because
                              overhead costs at Radford were down due to the rents obtained through
                              the Armament Retooling and Manufacturing Support Act 5 as well as the
                              infusion of Alliant’s own money for modernization purposes. Therefore, the
                              Army no longer required that the manufacturing contractors purchase
                              propellant from Radford for the 1999 multiyear contracts. The Army also
                              planned to award firm fixed-price contracts and split the work between its
                              two manufacturing contractors on a 60-percent/40-percent basis with the
                              lowest price offeror receiving the larger share.



Multiyear Contracts           The Army could achieve about $52 million in savings based on the
                              negotiated decrease in price per round from the 1995 to the 1999 multiyear
Provide Savings but           contracts if all contract year options are exercised.6 However, to absorb the
Reduce Radford                impact of decreased work at Radford due to the 1999 multiyear contracts,
                              Alliant negotiated price increases for propellant on other new contracts
Workload                      with the Army and reduced personnel. The reduction-in-force caused
                              Alliant to incur certain separation costs, and affected retirement fund
                              liabilities, including the employee pension fund, that funds retirees’ annual
                              annuities, and the post-retirement benefits fund, that funds retiree health
                              care costs. While the Army realized that Radford would be affected by the
                              tank training round contracts, it believed Radford was capable of attracting
                              additional business that would offset the loss of business due to the 1999
                              multiyear awards.


Multiyear Contracts Savings   According to the former head of the Army tank team, the Army wanted to
                              achieve certain savings for the 1999 multiyear contracts. However, after the
                              contractors had submitted their proposals, the Army realized that the
                              proposals would not allow them to achieve their savings goal. Once the
                              proposals were evaluated, the Army offered the contractors a price per
                              round based on a 50-percent/50-percent split rather than the original


                              5
                               The Armament Retooling and Manufacturing Support Act of 1992 encouraged, to the
                              maximum extent practicable, nondefense commercial firms to use government-owned,
                              contractor-operated ammunition manufacturing facilities of the Department of the Army.
                              6
                                The contract is for a base year plus 4 option years for specific types and quantities of tank
                              training rounds.




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                                         60-percent/40-percent split. To protect the integrity of the procurement,
                                         this offer was limited to acceptance or rejection in a short time period. If
                                         either contractor rejected the offer, the contracts were to be awarded
                                         according to the allocation stated in the solicitation. The contractors
                                         accepted the Army’s proposed price per round, which reduced the price of
                                         the rounds from the original proposals by an additional $1.2 million over
                                         the life of the contracts. This potentially could result in a total savings of
                                         about $52 million over the life of the contracts if all options are exercised.
                                         As shown in table 1, each type of training round decreased in price from the
                                         1995 multiyear contracts to the 1999 multiyear contracts.



Table 1: Price Per Round Savings From 1995 Multiyear Contracts to 1999 Multiyear Contracts

                              1995 Multiyear            1999 Multiyear            Price difference
Training round                contract price            contract price                  per round             Quantity                  Savingsa
M831A1                               $552.04                     $518.07                      $33.97           469,928              $15,961,461
M865                                  524.51                      490.70                       33.81         1,075,266                36,350,183
Total                                                                                                                               $52,311,644


                                         a
                                             Savings do not precisely calculate due to rounding associated with price difference per round.
                                         Source: Army Industrial Operations Command.




Price Increases Negotiated               As part of the acquisition strategy, the Army did not require the contractors
for Propellant at Radford                to purchase propellant from Radford for the 1999 multiyear contracts. One
                                         of the contractors chose a different producer for its propellant needs,
                                         resulting in Radford losing 50 percent of the tank training round propellant
                                         business it had under the 1995 multiyear contracts. To absorb the loss to
                                         the propellant business base, Alliant, which operates the Radford plant,
                                         allocated a portion of its overhead costs to other propellant products.
                                         Alliant negotiated price increases with the Army on at least two propellant
                                         products directly related to the loss of propellant business for the tank
                                         training round. One such product was the propellant for the Hydra-70
                                         rocket, a weapon system fired from helicopters such as the Apache and
                                         Cobra and aircraft such as the Air Force F-16 Falcon. The Army also agreed
                                         to a price increase for propellant for tank tactical rounds. The total impact
                                         of the increased prices is at least $14 million over the life of the contracts.




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Reduced Employment            To further reduce its overhead costs due to a reduction in its business base,
Levels and Contractor Costs   Alliant reduced employment levels. As shown in table 2, as a result of losing
                              50 percent of the tank training round propellant business, Alliant reduced
at Radford                    its workforce at Radford of 1,200 by 185 personnel, or about 15 percent.
                              Some left under a voluntary separation program or took Alliant’s offer of
                              early retirement for affected employees; others were laid off.



                              Table 2: Personnel Reductions at Radford

                                                                            Total number                Direct            Indirect
                              Type of reduction-in-force                    of employees            personnela         personnelb
                              Involuntary layoff                                        107                 93                 14
                              Voluntary separation program                                21                 6                 15
                              Voluntary incentive retirement                              57                 0                 57
                              Total                                                     185                 99                 86


                              a
                                  Direct personnel are those who work directly on the production lines.
                              b
                                  Indirect personnel include non-production positions such as maintenance personnel.
                              Source: Alliant Techsystems−Radford.


                              According to an Alliant official, Alliant incurred about $3.2 million in
                              severance and early retirement incentive costs to reduce employee levels
                              as a result of the reduced workload. The reductions also increased Alliant’s
                              liabilities for employee retirement pension and post-retirement benefits.
                              According to an Alliant official, based on an actuarial evaluation, as of
                              January 1, 1999, the pension fund was about $91.8 million overfunded. As a
                              result of the retirements, outlays from the pension fund will reduce this
                              surplus. At the time of this report, it is unknown how much the surplus will
                              be reduced, but according to an Alliant official, the reduction is not
                              expected to reduce the fund’s viability. The post retirement benefits
                              account, on the other hand, as of January 1, 1999, is underfunded by about
                              $57.2 million.7 An Alliant official stated that until their actuaries complete
                              their analysis at the end of calendar year 1999, the impact of losing the
                              propellant business on this account will not be known. The official
                              estimated that about $2.4 million in incentive costs it incurred for early
                              retirements were paid out of Alliant’s overfunded pension fund at Radford.


                              7
                                  According to an Army official, Alliant has developed a schedule for funding this amount.




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                              Severance costs totaled about $814,000 and were paid out of the plant’s
                              overhead account.


Army’s Assessment of 1999     According to an Army official, Alliant and Members of Congress raised
Multiyear Contracts’ Effect   concerns about the effect of the loss of business on overhead rates and
                              costs associated with a reduction-in-force. Due to these concerns, in
on Radford’s Operations       January 1999, the Army performed a cost analysis that showed personnel
                              would be reduced by about 11 percent and costs from the loss of propellant
                              business totaling about $17.5 million over the life of the contract would be
                              allocated to other Department of Defense programs. The Army’s Cost and
                              Economic Analysis Center reviewed this analysis and found it to be
                              reasonable. The Army did not alter its procurement strategy because, as
                              previously discussed, Radford had decreased its overhead costs and,
                              therefore, the Army believed Radford could successfully compete for
                              future contracts, thereby minimizing the impact of the loss of tank training
                              round propellant production to the business base. In fact, since the award
                              of the tank training round contracts, Radford won the propellant contract
                              for the Hydra-70 rocket.



Replenishment Mission         Radford has sufficient capacity to perform its replenishment mission with
                              additional personnel. The plant is capable of producing about 100 million
Is Not Threatened             pounds of propellant per year; while its current production is 10 million
                              pounds per year. According to current Defense Planning Guidance on
                              ammunition replenishment, Department of Defense components are to
                              provide the capability to replace the projected consumption (for one major
                              theater war) of critical munitions, troop support items, and spares
                              generally within 3 years. This mission requires Radford to produce about
                              92 million pounds of propellant and 97 million pounds of trinitrotoluene,
                              also known as TNT, if needed. According to an Alliant official, in order to
                              accomplish this mission, Radford has to maintain a large facility and
                              operating production lines. The official stated that losing 50 percent of the
                              tank training round propellant business has no immediate impact on
                              Radford’s ability to meet its wartime replenishment mission since
                              production lines are operating. However, if enough business is lost and
                              lines are shut down, there is increased risk that replenishment schedules
                              cannot be met within the Defense Planning Guidance time frames without
                              increased expenses.




                              Page 7                                        GAO/NSIAD-00-34 Defense Logistics
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Agency Comments   On October 25, 1999, we requested comments on a draft of this report. The
                  Director of Strategic and Tactical Systems in the Office of the Under
                  Secretary of Defense for Acquisition and Technology provided oral
                  comments on November 5, 1999. The Director concurred with the report.



Scope and         To determine whether the Army’s actions in 1999 resulted in savings on the
                  purchase of 120-mm tank training rounds and the effect of the Army’s
Methodology       decision to no longer direct that propellant be purchased from Radford on
                  plant overhead and employment, we reviewed the contract files for the
                  1995 and 1999 multiyear contracts, compared the prices of other
                  Department of Defense products produced at the plant before and after the
                  award of the second multiyear contracts, reviewed the cost analysis
                  performed by the Army, and analyzed employment levels at Radford before
                  and after the loss of propellant business, including the effect of workforce
                  reductions on retirement funds. We also interviewed officials at the Office
                  of the Secretary of Defense, Washington, D.C.; the U.S. Army Cost &
                  Economic Analysis Center, Falls Church, Virginia; the Army Materiel
                  Command, Alexandria, Virginia; the Industrial Operations Command, Rock
                  Island, Illinois; the Radford Army Ammunition Plant, Radford, Virginia;
                  Alliant Techsystems Headquarters, Hopkins, Minnesota; and Primex
                  Technologies Headquarters, St. Petersburg, Florida.

                  To determine the potential effect on Radford’s wartime replenishment
                  mission, we reviewed the plant’s replenishment requirements and the
                  requirements contained in the current Defense Planning Guidance and
                  discussed replenishment with Army and contractor officials.

                  We conducted our review from May through October 1999 in accordance
                  with generally accepted government auditing standards.


                  We are sending copies of this report to the Honorable William Cohen,
                  Secretary of Defense; the Honorable Louis Caldera, Secretary of the Army;
                  the Honorable Jacob Lew, Director, Office of Management and Budget;
                  Senator Carl Levin, Ranking Minority Member, Senate Committee on
                  Armed Services; Representative Floyd D. Spence, Chairman, and
                  Representative Ike Skelton, Ranking Minority Member, House Committee
                  on Armed Services. Copies will also be made available to others upon
                  request.




                  Page 8                                       GAO/NSIAD-00-34 Defense Logistics
B-282830




Key contributors to this report are listed in appendix I.

Sincerely yours,




David R. Warren, Director
Defense Management Issues




Page 9                                         GAO/NSIAD-00-34 Defense Logistics
Appendix I

GAO Contact and Staff Acknowledgments                                                               AA
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GAO Contact           Ronald L. Berteotti (214) 777-5702




Acknowledgments       In addition to the name above, Kimberly C. Seay, C. Douglas Mills, Jr., and
                      Robert J. Rivas made key contributions to this report.




(709414)      Leter   Page 10                                       GAO/NSIAD-00-34 Defense Logistics
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