IS CUTTING SUPPLIERS TO CUT COSTS A SMART MOVE FOR UNCLE
Update July 13, 2014 You probably never heard of the Defense
Logistics Agency but its the military office that buys goods and services for the armed services including food to feed the
military at bases and in the field, including when they are in combat zones. In May of this year, the Defense Logistics
Agency announced a plan to dramatically cut the number of suppliers of various food items with the goal of controlling costs
and getting a better deal for the government and ultimately for taxpayers. But we have to ask if cutting the number
of suppliers from many suppliers to just a few creating an oligopoly is wise and will in fact limit competition and possibly
raise prices? We also have to ask if cutting the number of suppliers might put the government's supply program in jeopardy
if for some reason something impacts the few suppliers that the government has chosen to do business with?
In a document available on the Internet (click here) the Defense Logistics Agency outlined a plan that listed the reductions in the number of suppliers for various food items.
For example, the number of suppliers of chicken would be reduced from 26 to 2 and they would share what amounts to $121-million
of sales; the number of turkey suppliers would drop from 25 to 2 and they would share $28-million of sales; the number of
beef suppliers would drop from 31 to 3 and they would share $185-million in sales. Critics of the plan point out that
consolidating the supply chain in so few companies risks price hikes in the future and a lack of supplies should one or more
of the companies run into production problems.
The DLA also says in its report that by dealing
with fewer suppliers it can get a better grip on prices and auditing costs. But critics wonder if the few suppliers
who remain -- most likely big businesses -- will have any incentive to control prices. Critics wonder if by eliminating
smaller producers the DLA is also cutting off competitors who might have more incentives to supply the DLA at lower prices.
There is also the possibility that jobs will be lost as more suppliers are cut from the DLA source list -- however
the DLA report does not discuss this.
One key question is simply this: is it better to have more
suppliers competing for government work or just a few, hand-picked suppliers, selling goods and services to the government?
The DLA is looking for savings of 10% to 20% with one-stop shopping by making these changes. We have to ask if fewer
competitors will really accomplish those savings?