DLA – The Good, the Bad, and the Ugly

October 8, 2009 on 5:42 pm | In The Profession | Comments Off

The Defense Logistics Agency supplies almost every consumable item America’s military services need to operate, from groceries to jet fuel to light bulbs. It provides approximately 95% of the military services’ repair parts and 100% of the services’ subsistence, fuels, medical, clothing and textile, construction and barrier material. It then disposes of surplus material and supplies. It has operations in 48 of the fifty states including Alaska and Hawaii (the neglected states are Vermont and Iowa) and would be #57 on Fortune’s 500 list (if it were a company). So in terms of basic commodities, if you are looking to sell to the government DLA is a key agency to consider.

DLA managed $2.07 billion in foreign military sales for FY 2008 and supports 126 allied nations. It employs 23,000 military and civilian employees. Manages 6.4 million items in eight supply chains and processes 114,000 requisitions every day. It conducts 11.200 contract actions every day and supports 1603 weapon systems. It spends about $35 billion every year, and that number went to $42 billion in 2008. It is a very busy and productive place. It’s contracting specialists are some of the best and working for DLA gets you vast experience very quickly. Speed and efficiency are key measures of success, and unlike many logistic functions – soldiers’ lives depend on DLA’s effective execution of its mission. It is a high-pressure, but very rewarding environment.

Historically, although its roots go back to WWII, DLA has only existed since 1961. In that year, Secretary of Defense Robert McNamara ordered that the previous single-manager agencies(where each branch of the armed services had responsibility for certain commodities) be consolidated into one agency. The Defense Supply Agency (DSA) was established on October 1, 1961, and began operations on January 1, 1962. In 1965, DOD consolidated most of the contract administration activities of the military services to avoid duplication of effort and provide uniform procedures in administering contracts. Officials established the Defense Contract Administration Services (DCAS) within DSA to manage the consolidated functions.

DLA took on its present name on January 1, 1977, when DOD changed the name of the Defense Supply Agency to the Defense Logistics Agency. In 1990, DOD directed that virtually all contract administration functions be consolidated within DLA. In response, the agency established the Defense Contract Management Command, absorbing its Defense Contract Administration Services into the new command. You might here some of us still refer to DCAS or DSA, much as we sometimes here references to the ASPR! Some old habits die hard.
This past September, however, Congress heard testimony from the Government Accountability Office that suggested that perhaps DLA was not functioning quite as it should. According to this report DOD faces challenges in making sure that DLA gets value for the taxpayer’s dollar and obtains quality commodities in a cost-efficient and effective manner. Key areas of concern include clearly defining its requirements, using the appropriate contract type, and effectively overseeing contractors. Specifically the GAO has found the following problems:

Accurate Requirements Definition – Without a good understanding of customers’ projected needs, DLA is not assured it is buying the right items in the right quantities at the right time. GAO’s prior work has identified instances where problems in properly defining requirements can lead to ineffective or inefficient management of commodities. For example, GAO reported in 2005 that while DLA had a model to forecast supply requirements for contingencies, this model did not produce an accurate demand forecast for all items, including Meals Ready-to-Eat. As a result, the demand for these items was underestimated and some combat support units came within a day or two of exhausting their Meals Ready-to-Eat rations.
Sound Business Arrangements – Selecting the appropriate [contract] type is important because certain contracting arrangements may increase the government’s cost risk where others transfer some of that cost risk to the contractor. For example, GAO noted in 2007 that DLA’s Defense Energy Support Center was able to purchase fuel and supply products for the forces in Iraq more cheaply than an Army Corps of Engineers contractor because DLA was able to sign long-term contracts with the fuel suppliers.
Proper Contract Oversight and Management – Failure to provide adequate contract oversight and management hinders DOD’s ability to address poor contractor performance and avoid negative financial and operation impacts. For example, in June 2006, GAO found that DLA officials were not conducting required price reviews for the prime vendor contracts for food service equipment and construction and equipment commodities. Agency officials acknowledged that these problems occurred because management at the agency and supply center level were not providing adequate oversight to ensure that contracting personnel were monitoring prices.

GAO-09-1040T

GAO acknowledged that DLA from its headquarters at Fort Belvoir in northern Virginia has taken some actions to address these challenges. For example, DLA has begun adjusting acquisition strategies to reassign programs to a best procurement approach. DLA has also established contracting officer’s representative training requirements to ensure these individuals are properly trained to carry out their responsibilities.

On the one hand it might be easy to say that after all this time, DLA should be able to get it right; that GAO should not still be finding these problems. When you look at these criticisms, however, they are identical to the very issues that EVERY contracting activity faces. Defining and understanding the requirement, placing the contract under the correct business arrangement, and overseeing the contractor are the three areas that require constant attention. Government contracting is very dynamic, resources are stretched too thin, and inadequate training conspire to create these perennial problems. No agency is immune.

But that doesn’t suggest that it is excused. Our profession MUST continually strive to properly define requirements and train those who do so. The variety of business arrangements must be understood. For example, when was the last time you saw a Fixed Price Redeterminable contract? Did you even know that such a contract type existed? Doing things a particular way because “that’s the way we’ve always done it” is just sloppy contracting. Contracting professionals MUST engage in continuous learning or they neglect one of the linchpins of being a professional. And having enough trained contract professionals is going to continue to be problem as the baby boomers continue to retire. These are not easy problems to solve. But that doesn’t mean we shouldn’t try. What can you do to address these three areas in your organization? The next GAO report might be a cut and paste from this one, only this time it will refer to your command, company, or service center.

Do You Compete With Federal Prison Industries?

October 7, 2009 on 3:44 pm | In Bids and Proposals, Marketing to the Government | Comments Off

Under applicable federal procurement rules certain products are required to be purchased from Federal Prison Industries (FPI). These purchases are intended to give prisoners productive work and a method to pay, at least in part, for their upkeep and maintenance. The problem is that there are companies in the commercial marketplace that are effectively frozen out of the federal market since they produced the same things as FPI.

In a recent decision, GAO had occasion to review the statutory and regulatory underpinnings of the current role of FPI in federal procurements.  Ashland Sales & Service Company. B-401481,September 15, 2009.

 FPI is a self-supporting, wholly-owned government corporation that was established to provide employment and training to federal penal inmates involving the production of commodities for consumption in prisons or for sale to government agencies. 18 U.S.C. §§ 4121, 4122 (2006); Federal Acquisition Regulation §§ 8.601(a), (b). For DOD, the requirements for the procurement of products from FPI are defined by the National Defense Authorization Act (NDAA) for Fiscal Year 2002, (citations omitted).

In 2008 Congress changed the process for determining when FPI is a preferred provider. This law created a new procedure for obtaining products from FPI for situations where FPI has been determined to have a “significant market share” of the product category in question as follows:

The Secretary of Defense may purchase a product listed in the latest edition of the Federal Prison Industries catalog for which Federal Prison Industries has a significant market share only if the Secretary uses competitive procedures for the procurement of the product or makes an individual purchase under a multiple award contract in accordance with the competition requirements applicable to such contract. In conducting such a competition, the Secretary shall consider a timely offer from Federal Prison Industries.
* * * *
For purposes of this subsection [2410n(b)], Federal Prison Industries shall be treated as having a significant share of the market for a product if the Secretary, in consultation with the Administrator of Federal Procurement Policy, determines that the Federal Prison Industries share of the Department of Defense market for the category of products including such product is greater than 5 percent.

So if FPI has captured 5% or more of a market segment, then DOD publishes that list from time to time as the DOD determines necessary. In the particular procurement before the GAO here, the product was “8405, Outerwear, Men’s” and it had been added to the list on June 3, 2009, with an effective date thirty days hence. Based on a solicitation issued within this window, and after conducting market research on these items as required by the statute, the agency decided to obtain them from FPI non-competitively. The protestor argued that since FPI now had a greater then 5% market share, the use of the set-aside was improper. The issues before GAO included the discretion of DOD in publishing the list with a later effective date, and the proper role of FPI in the federal marketplace.
The GAO analysis began with the interpretation of the relevant statute. For GAO and other decision makers when conducting statutory interpretation, they start with an analysis of the language in the law – does it provide an unambiguous expression of the intent of Congress? If so, the analysis ends there because the unambiguous intent of Congress must be given effect. (citations omitted) If, however, the statute is silent or ambiguous with respect to the specific issue, the decision maker will turn to the interpretation given to the statute by an agency responsible for administering the law; in this case DOD (citations omitted). Generally if the agency has interpreted ambiguous provision of the statute through a process of rulemaking or adjudication, the decision maker will provide great deference to that interpretation unless the resulting regulation or ruling is procedurally defective, arbitrary, or capricious in substance, or manifestly contrary to the statute. (citations omitted) On the other hand, where the agency’s position reflects an informal interpretation, deference is not warranted; in these cases, the agency’s interpretation is “entitled to respect” only to the extent it has the “power to persuade.” (citations omitted) The weight given to an interpretation under this lesser standard depends “upon the thoroughness evident in its consideration, the validity of its reasoning, its consistency with earlier and later pronouncements, and all those factors which give it power to persuade.”

So in a nutshell, and these rules apply whenever statutory or regulatory interpretation is required to resolve a dispute, if agencies follow a formal process of rulemaking/interpretation under authority granted to them by Congress then the courts and boards will generally follow that interpretation. If the interpretation is merely advisory, or informal in its creation, it is provided much less deference, but is given weight to the degree it makes sense and is persuasive. These are good rules to remember when reading laws or regulations.

Another rule of statutory interpretation cited by GAO is the rule that “[a] statute is passed as a whole and not in parts or sections and is animated by one general purpose and intent. Consequently, each part or section should be construed in connection with every other part or section as to produce a harmonious whole.” (citations omitted).

In this case, GAO determined that the timing of the update was proper, and even though a determination had been made that FPI had a greater than 5% market share for these products, the formal publication provided for 30 days to become effective. Thus the procurement from FPI under a non-competitive acquisition was proper.

So there are two lessons to consider here. If you compete with FPI, you will not have an opportunity to sell to the government unless and until FPI reaches a 5% market share. You might make your product commercially unique in a way that meets a government need, but is not copied by FPI. Intellectual property protection might be one way to do this. Second, this GAO opinion provides some excellent guidance on how adjudicative bodies interpret statutes and regulations. As confusing as they may be sometimes, these are standard rules of interpretation. Given the number of regulations and statutes that are involved in government procurement, these rules are worth remembering and applying.

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