Document created: 26 March 04
Air University Review, March-April 1971
Modern military aircraft, like the F-15, are complex and costly, but some of the reasons are not well known. Erroneous views persist. What are the facts?
Consider, for example, the money spent. Large aerospace firms are necessarily the prime contractors for any order of this size, but this does not mean that all the money ends up in their coffers. Far from it.
Profit margins on military contracts have been shrinking steadily in recent years. Thus firms doing both military and civilian work generally realize a considerably larger percentage of profit on nonmilitary work and seek it with correspondingly greater zeal. There is also the matter of subcontracting and sub-subcontracting all branches of the “procurement tree.”
The procurement tree of a major piece of military hardware is something to behold. It is about an order of magnitude more complex than in the halcyon “good old days” and more complex than most people today have any conception of. More important, the roots of this vast procurement tree spread out through a good part of the nation and the national economy. A surprising number of these roots end up in small business. (The small business portion amounted to $5.49 billion in prime contracts and $4.37 billion in subcontracts in fiscal year 1970.)
That is the way it should be, and the Department of Defense is making a concerted effort to increase the share of small business in the defense dollar when at all possible. Anyone unacquainted with the situation might be surprised to learn how hard the Department of Defense does try to give small business a piece of the action and how many different ways it pursues this goal.
These activities include the enforcement of special regulations, production of special publications, convening of meetings and seminars, even the appointing of special officials, small business specialists, whose full-time duties are providing aid to small businesses. Let’s consider why. Why does DOD go to all this trouble—or, indeed, to any trouble at all—to help the small businessman?
There are some pretty good reasons why. Understanding the problems of the small businessman, as well as of the big industrial concern, lends solidity and realism to the whole picture and well-founded confidence that the motivation for this activity is strong enough to make it something fundamental that goes far beyond mere gestures of good will and is likely to be sustained through various political fluctuations. The Department of Defense tries to help small business for several reasons: (1) It is good for the country and the economy to do so. (2) It is the will of our citizens, expressed clearly and repeatedly by many administrations through Congress and the executive branch of the government. (3) It is definitely in the interest of the Department of Defense, both short and long term.
The essence of the American economic system of private enterprise is free competition in free markets, free entry into business, and free opportunity for expression and growth of personal initiative and individual judgment. The preservation and expansion of such competition are basic to both the economic well-being and the security of this nation. Such security and well-being cannot be realized unless the actual and potential capacity of small business is encouraged and fully developed.
Americans—especially business people—can never afford to forget that small business has been, and is, the foundation of our American way of life. Small business has been our nation’s path to greatness, and it still is. Indeed, the first Virginia colonies were essentially small business enterprises. Today 19 of 20 American firms are small, and 85 of every 100 small firms have 20 employees or fewer. Statistics never tell the whole story, but they indicate direction and scope.
Small business does not dominate production today as it did a hundred years ago, when just about every one of the then 300,000 shops and plants was small by our standards of today. Yet, in terms of human satisfaction and growth dynamics, small business is just as vital today as it ever was.
The gross national product of the United States now runs to $950 billion a year, and small business is today producing more than $375 billion of that total. That is what President Johnson had in mind when he said, “Small business is big business.”
the small business and the DOD
Even if all the foregoing reasons were not enough, the Department of Defense has ample grounds for fostering and supporting small business wherever possible, based on self-interest alone. Small business has saved a great deal of money for the department. Case after case can be cited in which a small business firm has successfully competed with big business, winning a contract with a substantially lower bid that produced significant savings. The very existence of aggressively bidding small firms promotes a healthy spirit of competition in many areas obtainable in no other way, and the competition goes far beyond price competition alone. Some of the very best new ideas, products, and designs that have immeasurably strengthened our entire defense establishment have come from small firms. And there are some rather impressive evidence and statistics which tend to show that really new products and radical innovations are more likely to come from small firms than from large ones. With the need to make the utmost use of good new ideas and quality products, wherever they may occur, the Department of Defense could ill afford to disregard the small business, then.
The consideration of security is particularly relevant to the needs of the DOD. For vital defense items, it is contrary to the best national security interests to be dependent on a single supplier, or too few suppliers, however able and efficient they may be. Dispersion of procurement sources is good practice both economically and militarily.
The provisions mentioned thus far are part of DOD’S program for small business, and all bear the approval of Congress and the President. But additional and supplemental to this as what might be called the “DOD Small Business Program Proper.” For, after all, self-service is often the best service in this as well as other matters. Thus, the needs and emphases of the various departments, branches, and commands—down to the installation level—are stressed in numerous Department of Defense publications aimed at small business. And every procurement officer in every office, base, and camp throughout the country tries, in his own way, to aid and foster the role of small business in DOD procurement through primary contracting and subcontracting.
The volume and variety of DOD purchasing required for the local needs of this country and the world should not be forgotten. The military exchange services and the military commissary stores, for example, require mountains of supplies and are always on the lookout for good local suppliers.
The Department of Defense tries to help the small businessmen in many other ways: by furnishing assistance in obtaining information on current and future procurements, identifying individuals responsible for products of interest, conducting procurement conferences and general seminars, arranging meetings with appropriate officials, advising on subcontracting possibilities, and helping small businessmen over technical and administrative hurdles. It is DOD’s firm policy that no red tape should ultimately stand in the way of mutually beneficial business arrangements.
Perhaps the most striking thing that DOD has done to aid small business has been the appointment of 225 DOD small business specialists across the nation, who act as full-time advocates of small business within the department. They are “in the small businessman’s corner” and serve as watchdogs of his interests in every respect. A typical letter of such DOD small business specialists is included to help illustrate their activities. It gives one a glimpse at the realism and hardheadedness of their approach. No small businessman need feel like David facing Goliath when he has such friends and advocates.
So much for the general atmosphere and approach. The government has gone still further to ensure small business a share of the defense dollar. Three programs spell this out in an unmistakable manner: (1) the 100 percent set-asides; (2) the partial set-asides; (3) the breakouts.
Certain contracts are authorized by law to be “set aside” for small business exclusively. Small business can compete on all contracts with big business, of course, and does so successfully time and time again. But in the “set aside” competition, it is big business that has been ruled out. Since many contracts are necessarily large and comprehensive, “partial set-asides” are declared also, whenever practical, to guarantee small business a fair proportion of both the large and small defense contracts.
Finally, a special program in the interest of small business has been developed in procurement “breakouts,” which promote opportunities in subcontracting. From large, complex system procurements certain components and subsystems have always been open to subcontracting to small business. The volume of such subcontracting has been substantial. But now the Department of Defense takes the initiative and insists that certain components be broken out from the primary contracts and opened for small business subcontracting. By means of this breakout technique, DOD has been able to develop and stimulate competition, broaden the supply base, and secure better prices and earlier deliveries.
“Breakout” of the original Nike Ajax program, for example, resulted in a total savings to DOD of approximately $4.7 million. In the Sergeant program, the original contract was awarded 91% to the prime contractor. Through “breakout,” this share was reduced to 71%, and a savings of over $1.2 million was obtained for the first year alone. During fiscal year 1970 the Air Force saved $21.9 million by improving the method of purchasing spare parts, by procuring competitively from the manufacturer rather than from the prime contractor. Small wonder that DOD is actively and aggressively pursuing this “breakout” program, which has already produced such benefits for both DOD and small business.
One of the best means of acquainting small businessmen with DOD needs, requirements, and procedures is through procurement conferences. Many such meetings are held each year throughout the country; in 1967, 30 conferences, held in 18 states, attracted more than 10,000 businessmen and resulted in the addition of approximately 2000 names to DOD’s list and 650 names to Major Prime Lists. During a recent year, 32 conferences were held in 16 states; 23 of them were cosponsored by 12 senators and congressmen—total attendance: 12,076. Public notice of these conferences appears in the Commerce Business Daily as well as in DOD press releases.
Proof that all these efforts have borne concrete results is shown by a typical procurement tree. It is really a conclusive, as well as a graphic, final argument. If anyone doubts the role of small business in defense contracting or that the end effects extend wide, both geographically and economically, simply show him a complete procurement tree and ask him to take a closer look at the roots. They go deep, and they spread far and wide.
Mechanicsburg, Pennsylvania
Colonel John E. Bex, USAFR, is president of his own business, Bex and Associates, Medical Electronic Consultants, Mechanicsburg, Pennsylvania. His Reserves assignment is as procurement management staff officer, Office of the Deputy for Small Business, Hq USAF. He served on active duty in the Air Corps, 1942-46. Colonel Bex is a graduate of Squadron Officer School, Air Command and Staff College, Industrial College of the Armed Forces, and Air War College.
Disclaimer
The conclusions and opinions expressed in this document are those of the author cultivated in the freedom of expression, academic environment of Air University. They do not reflect the official position of the U.S. Government, Department of Defense, the United States Air Force or the Air University.
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