Defense Logistics: New 120-mm Tank Training Round Procurement Will Result
in Savings (Letter Report, 11/22/1999, GAO/NSIAD-00-34).

Pursuant to a congressional request, GAO provided information on the
Army's 1999 multiyear contracts for the procurement of 120-mm tank
training rounds, focusing on: (1) whether the Army's actions in 1999
resulted in savings on the purchase of 120-mm tank training rounds; (2)
the effect the Army's decision to no longer direct that propellant be
purchased from the Radford Army Ammunition Plant had on plant overhead
and employment; and (3) the potential effect the decision would have on
Radford's wartime replenishment mission.

GAO noted that: (1) 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; (2)
the Army expects to achieve the savings based on a negotiated decrease
in price per round from the 1995 to the 1999 multiyear contracts; (3)
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; (4)
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 totalling at least $14
million; (5) 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; (6) these
personnel reductions required the contractor to incur certain employee
separation costs and affected the contractor's retirement funding
liabilities; (7) 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; (8) the loss of propellant work does
not affect Radford's ability to meet its wartime replenishment mission;
(9) 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; (10) with additional personnel, this provides
more than adequate capacity for Radford to meet its replenishment
requirements; and (11) Radford officials stated that as long as the
propellant lines are operating, they would be able to replenish
propellant in accordance with requirements contained in Defense Planning
Guidance.

--------------------------- Indexing Terms -----------------------------

 REPORTNUM:  NSIAD-00-34
     TITLE:  Defense Logistics: New 120-mm Tank Training Round
	     Procurement Will Result in Savings
      DATE:  11/22/1999
   SUBJECT:  Private sector procurement
	     Army procurement
	     Ammunition
	     Military cost control
	     Military land vehicles
	     Department of Defense contractors
	     Reductions in force
	     GOCO
	     Multiyear contracts
	     Defense contingency planning
IDENTIFIER:  120mm Tank Training Round
	     Hydra-70 Rocket
	     Apache Helicopter
	     Cobra Helicopter
	     F-16 Aircraft

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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

                                                      National Security and
                                             International Affairs Division

B-282830

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 Ammunition/Footnote1/ 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 mission/Footnote2/ 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
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
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./Footnote3/ 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,/Footnote4/ purchase propellant for
the training rounds from Radford.

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/Footnote5/ 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 Provide Savings but Reduce Radford Workload
---------------------------------------------------------------

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
contracts if all contract year options are exercised./Footnote6/ However,
to absorb the impact of decreased work at Radford due to the 1999
multiyear contracts, Alliant negotiated price increases for propellant on
other new contracts 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
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****Helvetica:x11****1:    Price Per Round Savings From 1995
                                Multiyear Contracts to 1999 Multiyear
                                Contracts

---------------------------------------------------------------------------
| Training   :       1995 :       1999 :      Price : Quanti : Savings^a  |
| round      :  Multiyear :  Multiyear : difference :     ty :            |
|            :   contract :   contract :  per round :        :            |
|            :      price :      price :            :        :            |
|-------------------------------------------------------------------------|
| M831A1     :    $552.04 :    $518.07 :     $33.97 : 469,928: $15,961,4  |
|            :            :            :            :        :        61  |
|-------------------------------------------------------------------------|
| M865       :     524.51 :     490.70 :      33.81 : 1,075, :            |
|            :            :            :            :    266 : 36,350,18  |
|            :            :            :            :        :         3  |
|-------------------------------------------------------------------------|
| Total      :            :            :            :        : $52,311,6  |
|            :            :            :            :        :        44  |
---------------------------------------------------------------------------

aSavings do not precisely calculate due to rounding associated with price
difference per round.

Source: Army Industrial Operations Command.

Price Increases Negotiated for Propellant at Radford
----------------------------------------------------

As part of the acquisition strategy, the Army did not require the
contractors 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.

Reduced Employment Levels and Contractor Costs at Radford
---------------------------------------------------------

To further reduce its overhead costs due to a reduction in its business
base, 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 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****Helvetica:x11****2:    Personnel Reductions at Radford 

                                                                  
------------------------------------------------------------------------
| Type of reduction-in-force:      Total :      Direct :     Indirect  |
|                           :  number of : personnel^a :  personnel^b  |
|                           :  employees :             :               |
|----------------------------------------------------------------------|
| Involuntary layoff        :        107 :          93 :           14  |
|----------------------------------------------------------------------|
| Voluntary separation      :         21 :           6 :           15  |
| program                   :            :             :               |
|----------------------------------------------------------------------|
| Voluntary incentive       :         57 :           0 :           57  |
| retirement                :            :             :               |
|----------------------------------------------------------------------|
| 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./Footnote7/ 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. Severance costs totaled
about $814,000 and were paid out of the plant's overhead account.

Army's Assessment of 1999 Multiyear Contracts' Effect on Radford's
Operations
---------------------------------------------------------------------------

According to an Army official, Alliant and Members of Congress raised
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
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 Is Not Threatened
---------------------------------------

Radford has sufficient capacity to perform its replenishment mission with
additional personnel. The plant is capable of producing about 100 million
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.

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 Methodology
---------------------

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
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.

Key contributors to this report are listed in appendix I.

Sincerely yours,

*****************

*****************

David R. Warren, Director
Defense Management Issues

--------------------------------------
/Footnote1/-^ Conventional ammunition includes artillery, bombs,
  demolition material, fuzes, grenades, mines, mortars, propellant
  charges, pyrotechnics, unguided rockets, small arms, and tank training
  ammunition.
/Footnote2/-^ Replenishment means replacing ammunition losses after a
  conflict in accordance with defense planning guidance.
/Footnote3/-^ 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. 
/Footnote4/-^ Olin subsequently spun off its Ordnance and Aerospace
  Divisions, which became Primex Technologies. 
/Footnote5/-^ 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.
/Footnote6/-^ The contract is for a base year plus 4 option years for
  specific types and quantities of tank training rounds.
/Footnote7/-^ According to an Army official, Alliant has developed a
  schedule for funding this amount. 
GAO Contact and Staff Acknowledgments

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)

*** End of document. ***