Pentagon found to pay huge markups for food equipment

October 23, 2005|By KNIGHT RIDDER/TRIBUNE

WASHINGTON -- The Pentagon paid $20 apiece for plastic ice cube trays that once cost it 85 cents. It paid a supplier more than $81 apiece for coffeemakers that it had bought for years for just $29 from the manufacturer.

That's because instead of getting competitive bids or buying directly from manufacturers as it used to, the Pentagon is using middlemen who set their own prices. It's the equivalent of shopping for weekly groceries at a convenience store.

It's costing taxpayers 20 percent more than the old system, a Knight Ridder investigation found.

The higher prices are the result of a Defense Department purchasing program called prime vendor, which favors a handful of firms. Run by the Defense Logistics Agency (DLA), the program is based on a military procurement strategy to speed delivery of supplies such as bananas and bolts to troops in the field.

Military bases have the option of getting competitive bids, but the Pentagon has encouraged them to use the prime vendor system. At the DLA's main purchasing center in Philadelphia, prime vendor sales increased from $2.3 billion in 2002 to $7.4 billion in the fiscal year that ended Sept. 30.

The Defense Department describes the program as one of its "best practices" and credits it with timely deliveries that have eliminated the need for expensive inventories and warehousing. For purchases under the food prime vendor program alone, the DLA claimed a savings of $250 million in five years.

But those savings would have happened even without turning to the prime vendor program, competing suppliers say. For years, most suppliers have offered goods on an as-needed basis so that the military doesn't need to store them in costly warehouses.

Knight Ridder chose to examine just one aspect of military purchasing - food equipment - but the prime vendor program is being used increasingly for everything the Pentagon buys.

"There is nothing prime about the program. In fact, it's very expensive," said Keith Ashdown, vice president of the Washington-based nonprofit Taxpayers for Common Sense. "They have reduced competition, and now we're seeing them pay higher prices."

In response, the DLA warned that comparing prime vendor and non-prime vendor prices - as Knight Ridder did - is "extremely difficult" because shipping, installation and special modifications to items might result in higher charges.

Though DLA officials declined to be interviewed for this story, they did answer some questions by e-mail. The DLA said that price comparisons "do not take into account the large investment, infrastructure and manpower savings the government realizes from its prime vendor program." Others say these are savings that would be realized in any event, as long as the government bought from suppliers, prime or non-prime, willing to deliver just in time.

In thousands of purchases of food service equipment items, Knight Ridder found major markups. The case of a special 7-foot refrigerator-freezer for airplanes illustrates the problem.

MGR Equipment Co. of Inwood, N.Y., which makes the unit, charged the DLA $17,267 in 2003 for each one. That's the price that MGR President Gerald Ross said he charges everyone.

In September 2004, prime vendor Lankford Sysco Food Services Inc. sold the government nine MGR refrigerators for $32,642.50 apiece - a markup of 89 percent. The government paid $138,445 extra, when all prices were adjusted for inflation into 2005 dollars.

"We'd like to see the government get the best pricing, but we get the same amount regardless of whether we sell to [a prime vendor] or whatever," Ross said. "The government is aware of this. They're aware they're paying a premium for going through prime vendors."

Lankford Sysco didn't respond to three phone calls for comment.

The markups upset Charles Jones, president of Commercial Marketing Co., a Columbia, S.C., vendor cut out of the prime vendor program. He sells kitchen equipment, but because of the prime vendor program, his sales are limited to a few bases. "What value is this prime vendor program adding? Zero," Jones said. "We think it's a crooked deal."

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