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Show HILL Friday, eidldlir Agv 26, 1993 iy ports parts do represent the security of this nation, and doing without them is not a viable alternative. Indeed, it's not unlike having your new, car break down in the middle of the desert with onfuel-injecte- TOP TIMES 3 d !:S:::p:o:iS ly one qualified mechanic around. Generally speaking, there are two truths in a situation like this: You have to get the car fixed; and it won't be cheap. Such is the law of supply and demand; such is the cost of new technology. But the cost of new technology alone is not the culprit; older technology also plays a big part in driving up prices. Machines tend to get more expensive to maintain as they age. They tend to break down more often, the parts become harder to find and when you do find them, they can cost an arm and a leg." i? F or example, anyone who tries to maintain, say, a AM radio from the '60s will find that replacing just one of the tubes today can cost more than the entire radio cost originally. In this case, the vacuum tube technology of the '60s has been replaced in our society by modern solid state devices. In effect, there's little competition left in manufacturing vacuum tubes these days. That's why the cost of supporting vacuum tube radios is now so high. In fact, that's why most people have thrown away their five-tub- e radios. we the handled 1950s, During technological advances differently than we do today. Think about it. We built about 2,000 but when the 7 technology became outdated, we basically threw them all away, and built over 800 to replace them. But those haven't been thrown away, even though they're almost three decades old. Unlike five-tub-e radios, given the budget restraints in past years, it's just been too expensive to replace them. And the 2 is not alone, for this pattern generally holds true for the entire fleet. Today, in fact, the average Air Force aircraft is almost 14 years old, not counting guard and reserve systems, which are even older. And there are fewer contractors around to support them. This lack of competition, then, has helped create the dramatic increases in the cost of many spare parts because, frankly, not many companies want to make them anymore. Indeed, for the few defense contractors left, the technology required is often no more than an anachronism of the past something in which there is no future and no growth potential something which the free enterprise system tends to reject. five-tub- e B-4- B-4- 7s B-5- B-5- 2s 2s B-5- . . J ust who wants to be trained in "vacuum tube" technology today? Where do the contractors find the skilled people? Frankly, that's why spare parts for old airplanes can be so expensive and that's so fast as newer techwhy the price can go up nologies diffuse exponentially throughout our society, displacing that which is out of date, but which we still have in service. Now for the coup de grace. About the time the neglect of the '70s came to bear including the effects of budget cuts, limited buys, reliance on strategic materials, reduced competition from the loss of so many defense contractors, the reality of fewer skilled people in and out of government, and the increased burden of supporting old technologies about the time all this happened, and at a time of high economic inflation the Soviets invaded - their American took Afghanistan, the Iranians and the nation found a new awareness hostages of the threat to its security. The result, of course, was a dramatic increase in military requirements, along with additional funding to meet these requirements. But we were lead time away in terms of getting the skilled people, the industrial capability, and the kinds of sophisticated, computer-base- d management systems needed to cope with the problem. Yet the requirement to buy .." was "right now." ... Beginning in 1980, there was great pressure on the Air Force to somehow catch up, to overcome the deficits incurred during the '70s. In fact, Air Force outlays in constant dollars rose as fast then as they had fallen 10 years earlier. The emphasis was on getting combat capability, causing us to buy faster, but at higher cost. Such procurement mechanisms as the fixed price redeterminable contract were used to ensure we got what limited capability our defense industry could bring to bear. The only way to get what we needed was to commit ourselves well in advance to a future buy, without knowing what the exact price would in effect, playing the "futures" market in be defense. And in many cases, the price turned out to .be yery high.c j I That, in a nutshell, is how we got to where we are today but just where are we? How serious is the parts pricing problem? Clearly, the problem is very serious but given the causes and the situation, it is neither as surpising nor as widespread as many would have us believe; and it is certainly not a malevolent manifestation of a corrupt or incompetent system. In fact, it was the system which first brought it to light. The Hancock Report, which came from AFLC's Oklahoma City Air Logistics Center, first identified items believed to represent wasteful, tax expenditures. The investigation did not start in the press; rather, it started as a normal Air Force inquiry. And Mr. Hancock was not a "whistle blower" running counter to the wishes of the system; he was doing exactly what he was hired to do by the system. Indeed, there's been no cover up by the government; there's only been an "uncovering" one which has included internal AFLC audits, a GAO investigation, and many other federal investigations. In terms of parts pricing, we do have very serious there's no denying that. And just as problems clearly, considering that our national security is on the line, we must take strong action to ensure we absolutely correct whatever deficiencies exist in the system. that end, the Secretary of Defense has ordered that we develop new procedures to increase competitive bidding, that we challenge all prices which are out of line, and that we refuse to pay any o price which is proven to be unjustified. He has also directed that we accelerate reform of basic contracting procedures, that we get our money back if possible, and that we take appropriate action against contractors or federal employees who engage in excessive pricing practices. Fortunately, we already have many mechanisms in existence to deal with the situation, and carry out the secretary's direction. And we have many on line. For example, the Air Force's Zero Overpricing Program was established in 1979 to catch excessive prices resulting from overpricing or catalog errors. Using this system, any consumer in the system has the means to challenge his bill before it's paid. In 1980 alone, there were 3,000 challenges on prices, and that number had risen to 5,000 in 1982. About 10 percent of these have been found to be overpriced items, while another 12 percent and we're takhave represented catalog errors back. our money ing action to get We've also established the Office of the Competition Advocate in all five ALCs, with coordination The purin the headquarters at Wright-Pattersopose here is to generate initiatives which will emphasize competition and competitive pricing. And we've developed another program called Pacer Price, which has already screened 529,000 items for evidence of dramatic price increases. What we've found is that from 1982 to 1983, only four percent of the items screened showed increases of 0 percent; and only an additional four percent had increases over 100 percent. Indeed, 92 percent of the items remained constant, or actually went down in price. Pacer Price now provides an effective mechanism to check the overall process of buying items with the goal of coming up with what the items should cost and then providing an effective review process' when- an item cannot be purchased at this more-comin- g n. 30-10- - validated price. And we've already had some significant successes here. For example, the $2,000 pair of pliers mentioned earlier was identified by this process, along with the fact that the price should have been a bit over $200. The next time we bought them, we paid about $225 each, and the company refunded the money overcharged on the earlier buy. We've also gone out to our suppliers for their ideas on how to improve the way we let them know about potential business; and I've inaugurated a command-wid- e program to elicit from the work force their ideas on how we can ensure a fair price for the goods and services we procure. There's also the Air Force Management Analysis Group, established by the Air Force to look at all aspects of spare parts buying, from up front in the acquisition process of a weapon system, all the way through to maintaining the system during its life cycle in the field. The group has two objectives: to come up with long term procedural regulations to preclude parts pricing problems from recurring; and, in the immediate, short term, to do something right now to fix whatever problems we might be having. In conclusion, let me just say that the problem of high prices for spare parts came from a dynamic and complex set of social, economic and technological influences a holistic set of circumstances which effectively increased demand, while at the same time, decreasing the means of meeting that demand. In fact, to a great extent, the problem is simply a manifestation of years of neglect of one kind or another including years when it was fashionable to attack the "military industrial complex," to reduce its profits, and cut its business. The long-terresult, of course, has been less national defense, often at a considerably higher price. In a free enterprise economy like ours, reducing competition never helps it only hurts. For competition truly is the fabric of our society. It is comit is competition which encourages innovation best which applies resources to the task at petition hand and it is competition which can make our national defense more affordable. m That's why I believe we must be careful in forsolutions to the generic problem mulating of defense costs including parts pricing concerns. We must not strike out blindly at corporate profit, because such profit is what drives the American economic system. Indeed, profit isn't bad; on the contrary, it's really the life blood of the free enterand the free enterprise system is prise system the life blood of our country. Obviously, we must do a better job controlling cost. And the free enterprise system will do that for us if we let it. But we first must create a more com- petitive, coherent defense environment one where the profits are there to be made but only by those companies which have the most innovative ideas, and which succeed in supplying the best material at the lowest possible price. To that end, I propose that "This is the Place," and this is the time to get it going for the military and industry to get their acts together, and come out fighting for freedom, free enterprise, and unfettered competition. That way we can provide this nation with the defense it needs, and at a price it can afford. , Thank you - : long-ter-m - |