Part I
PROCUREMENT AND DISTRIBUTION
OF MEDICAL SUPPLIES
IN THE ZONE OF INTERIOR
CHAPTER II
Central Procurement of Medical Supplies
MEDICAL SUPPLY UNDER THE ARMY PROGRAM
When the United States entered the war, procurement ofmedical supplies and equipment was still based on the depot replenishmentsystem, modified to approximate the needs of an expanding army. Quantitiespurchased were sufficient to replenish depot stocks and to equip new troop unitsas they were raised, but the computation of maintenance and replacement needshad supply officers treading the thin ice of prophecy. There had been noexperience to furnish guidelines for conjecture, and the procurementdifficulties of 1940-41 were magnified as more and more men were brought underarms in the early months of 1942. Purchase authorizations were issued for suchenormous quantities of some items that manufacturers were astounded at the sizeof the orders. Within a few weeks their judgment would be confirmed by cutbacksin procurement; but, very frequently, increased purchase authorizations wouldsend total requirements to a new height. In other items, a hand-to-mouth policywould be adhered to, and a small purchase authorization would be issued. Thiswould be followed by another and still another, until as many as 15 separatepurchases of a single item had been authorized within a short period of time.
Role of the Army Supply Program
To remedy the defects which had appeared in the procurementprograms of nearly all the technical services, the Army Supply Program wasinstituted in July 1942. Prepared each 6 months, this program for the MedicalDepartment was a computation of quantities required in approximately 4,500medical items. It was intended to present an orderly buying program, based uponcarefully estimated requirements. Stop-and-go buying, which had so confusedprocurement in the earlier period, would be eliminated; and contractors wouldreceive an overall picture of the Army's needs.
The Army Supply Program played a vital role in World War IIlogistics, going far to prevent confusion, duplication, and competition betweenArmy and Navy and among the technical services; it provided a blueprint formilitary procurement planning. The Medical Department had a heavy stake in itssuccess because medical supply cataloged a wide range of items common to one ormore of the technical services and, of course, to the Navy. Under the ArmySupply Program, the technical services could determine their respectiverequirements on the same troop basis, with a unified strategic plan in view. Theprogram provided for purchasing on the authority of a single correlated
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program. From a complete absence of coordination between Armyand Navy, certain specialized items were now procured by one service for both.
Although items of medical supply were regarded as secondary,low in unit value, and insignificant in relation to total War Departmentexpenditures, the Army Supply Program still attempted to classify them by orderof importance. In terms of raw materials, facilities, funds, and militarynecessity, some 300 Medical Department items were designated as"critical" and 400 as "essential." Beginning with theprogram of 1 August 1943, these two categories together became part A, definedas primarily tactical equipment, with an added part B consisting of"miscellaneous and expendable supplies." The Army Supply Program forcalendar year 1944, as outlined in the 1 August 1943 document, listed MedicalDepartment items aggregating $175,181,922 under part A, and items valued at$118,089,828 under part B.
These figures were somewhat modified in the program of 1February 1944. Part A was increased to $179,026,115 while part B was reduced to$75,542,268. These figures reflect the buildup of the Army and the heavyrequirements for initial supply of the equipment type items that represented thebulk of part A. The part A items were about 4 percent of the total number ofmedical supply items on which some degree of stock control action was exercised.Undoubtedly, the Army Supply Program was a great improvement over the loose,uncoordinated efforts which preceded it. It infused into procurement an air ofstability and steadiness that was reassuring. But it possessed one importantdisadvantage, which, within little more than a year and a half, caused theMedical Department to abandon it as a procurement objective. Since it wasprepared at widely separated intervals (every 6 months), it could not keep stepwith changing needs. Moreover, the advance period being contracted for was from1 year to 18 months. Because of this long lead time, items on which short supplydeveloped were not given attention until the situation became serious.Similarly, where the issue rate was not so high as the Army Supply Programanticipated, excess stocks developed which made contract terminations necessary.1
The Delivery Needs Plan
To bring purchases more nearly in line with actual stockconditions, the Delivery Needs Plan was put into effect in the latter part of1943. A Delivery Needs report was prepared at 2-month intervals by theDistribution and Requirements Division, Supply Service, based upon therequirements figures included in the Army Supply Program. The figures wereadjusted, however, by subtracting from them the current stock-on-hand and due-infrom procurement figures which were obtained from depots. Product of the skilland imagination of Mr. Herman C. Hangen, on loan from J. C. Penney Co., and Mr.Mead M. Messick, on loan from Montgomery Ward & Co., the Delivery
1(1) Army Supply Programs, Section I, Equipment, Ground (Medical), 1 Feb. 1943, 1 Aug. 1943, and 1 Feb. 1944. (2) Annual Report, Army Medical Purchasing Office, fiscal year 1944.
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Needs Report was the first long step toward an integratedcentral stock control system. Initially, this was prepared manually in StockControl by one officer and one clerk. It commenced with an electric accountingmachine listing by item number and nomenclature. The source material, abstractedfrom the Distribution Work Sheets, consisted of the printed requirements, backorders on issue requisitions, and ready assets, which included stocks on hand ordue-in by transfer. Dues-in from procurement were not included, but an effortwas made to ascertain that dues-in from transfer were accurate. The printedrequirements reflected 6 months' anticipated consumption, both domestic andoverseas, and the level established to support the assembly and MedicalMaintenance Unit programs.
The Delivery Needs Report also became the guide toprocurement for items requiring expeditious action to speed up deliveries ifcontracts were in being, and similarly provided a list of items for whichpurchase action should be taken in the order of their urgency. A supplementaladvantage was provision of a guide for establishment of delivery schedules, asit indicated the relative stock position of all items. This same feature of thereport later provided means of identifying excesses and thus became a basis forprocurement cutbacks.
Of greater importance and for the first time, Requirements,Procurement, and Stock Control personnel had a common point of reference byitem, from which they could take action. As a byproduct, Resources personnel hadavailable to them an item breakout from which they could better determine rawmaterial needs. In those days of critical shortages and tight controls, theDelivery Needs Report provided invaluable detailed data for justification ofMedical Department raw material requirements. The timely availability of medicalsupplies in the bitter fighting days of 1944-45 was largely the product of thissimple practical device. The system was more successful than the Army SupplyProgram, which it closely approximated, except that changes in stock conditionswere considered every 2 months; but, even with this improvement, it did notreflect changes in needs or stock conditions often enough to provide a reliableprocurement program. The basic problem continued. Procurement was not beingcoordinated with needs as reflected in current issues.
Stock Level Purchasing
To solve the problem just described, the system of Stock LevelPurchasing was instituted in February 1944, and continued in effect during theremainder of the war. Since this system depended upon close cooperation betweenstock control and procurement, the Inventory Control Branch was moved fromWashington, D. C., to New York, N. Y., in November 1943, and the remainder ofthe Stock Control Division was subsequently transferred.
Stock Level Purchasing employed the same rates of call andthe same maintenance factors used in the Army Supply Program, but the purchaserequirements thus obtained were subject to frequent review and revision. The
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object of the system was to maintain a predetermined stocklevel in all depots. New stocks of any item were ordered by the procurementoffice whenever it appeared that stocks on hand and on order, less probableissues during the period required for delivery (lagtime), would fall below theestablished level. The amount of each purchase was determined by a conferencebetween the buyer and stock control officers, and it depended upon conditionsaffecting the manufacture of the item. When raw materials and manufacturingfacilities were readily available, small purchases frequently repeated would beauthorized. If the manufacturing process was difficult, a large quantity wouldbe authorized for delivery scheduled over a longer period of time.
All items were reviewed monthly by an examination of theConsolidated Stock Report, which consisted of semimonthly stock reports ofindividual depots. In addition, specific items which were in short supply werereviewed more frequently. Thus, the shortest practicable time elapsed betweendevelopment of a need and placing an item in procurement. The system alsoeliminated peakloads in purchasing activity because a relatively small number ofitems was purchased monthly. Since the period contracted for was reduced to aminimum, contract terminations became less frequent.2
The purchasing plan just described represented a return, in amodified form, to the Depot Replenishment System. Greatly improved recordkeepingand the more frequent submission of reports helped to make its operationsmoother and its success more nearly complete, but the major difference was theissue experience that was now available on which to base purchase requirements.When experience was inadequate, serious difficulties still resulted. Forexample, during the first 9 months of 1944, the issue of Fraser's Solution-aniodine preparation used in the treatment of athlete's foot-was relativelysmall, approximating 10,000 bottles a month. In October 1944, with the launchingof the Philippine campaign and the simultaneous arrival of the rainy season inthe archipelago, requisitions increased so greatly that port shortages ofconsiderable size began to appear. Purchases of the solution were immediatelyincreased so that, by the end of November, 132,000 bottles were under contractfor immediate delivery and an additional 250,000 bottles were ordered fordelivery during the first 5 months of 1945. But, in the middle of December 1944,very large requisitions from overseas increased port shortages by 650,000bottles. Since there had been so little previous activity in this item, theSupply Service was unable to cope with such heavy demands.3Neither raw materials nor manufacturing facilities were available toproduce the required quantities, and it was not until February 1945 that thesituation was brought under control.
The Stock Level Purchasing System was satisfactory so long asthere were no great and sudden fluctuations in issue; but there was always thepossibility that unexpectedly large requisitions would deplete depot stocks to a
2(1) Hornbacher, Arthur: Determination of Purchase Requirements. [Official record.] (2) Annual Report, Inventory Control Branch, Supply Division, OTSG, fiscal year 1944.
3See footnote 1(2), p. 36.
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point far below the reorder level, and that months wouldelapse before deliveries from contractors would replenish the supply. If asystem of computing accurate requirements could have been developed, the problemwould have been solved, but the available maintenance factors were toounreliable to guide procurement. As the war closed, maintenance factors baseddirectly upon Zone of Interior and overseas issues were computed, in the hope ofproviding a sounder basis for the estimation of requirements during a futurewar.
F.O.B. Origin Contracts
Until early 1944, virtually all purchases were F.O.B.destination. After that date, most contracts were based on delivery at the pointof origin. This change, instigated by the Inventory Control Branch,substantially increased the administrative workload of the Army MedicalPurchasing Office because the cost of transportation from factory to depotvaried with the location of each site.
On the other hand, under terms of F.O.B. destination, costcomparison by depot was relatively simple. Scheduling and destination, moreover,were part of the contract and, in general, one document accomplished all thatwas required from the buyer's viewpoint. Under F.O.B. origin terms, contractsspecified quantity and shipping schedule in total, which required the buyer tomaintain an open contract file and to contact the Inventory Control office 30 to60 days before each scheduled shipping phase for the quantity breakout byspecific depot.
Like the earlier modification of the Army Supply Programprocedure by the Delivery Needs Report and the later substitution of the StockLevel Purchasing System, the replacement of the F.O.B. destination by the F.O.B.origin contract was a step closer to the objective of calculating requirementson the basis of the most recent experience and scheduling deliveries against thelatest stock position. Better distribution of stock by the depot was made inApril, under F.O.B. origin contracts, than could have been made in the precedingJanuary because 3 months' issue demands could drastically alter the depotstock position. Furthermore, last minute diversions of F.O.B. origin contractscould be effected with greater ease, and maximum benefits were gained by the useof Government bills of lading. Probably the most basic and lasting effect ofF.O.B. origin contracts was involvement of buyers in operations, as part of thesupply team.
Army Service Forces Circular No. 67
The Army Supply Program, which was revised on 1 February and 1August of each year, was the basic requirements guide. With little or nowarning, the Army Supply Program of 1 February 1944 was replaced by procedurescontained in Army Service Forces Circular No. 67 as of 7 March 1944.4
4Smith, R. Elberton: The Army and Economic Mobilization. United States Army in World War II. The War Department. Washington: U.S. Government Printing Office, 1959, p. 162.
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This circular provided for comprehensive control ofprocurement inventory, and disposal of excesses; and established a 30-day cycleof reviews as compared to the semiannual Army Supply Program.
The major components of the Circular No. 67 system were: (1)calculation of 12 months' estimated issues, including anticipated initialsupplies and maintenance for Army and Lend-Lease, plus Civil Affairs and anyother known issue requirements; (2) total authorized stock level, whichcomprised depot stock levels in the Zone of Interior and in theaters ofoperations, contingency reserve, strategic reserve, and production reserve; (3)a supply and demand status which was determined by application of the 12 months'issues plus authorized stock levels minus the sum of stock on hand plusquantities on contracts undelivered; and (4) a determination of excesses whereassets in (3) were greater than calculated requirements from (1) and (2).
Circular No. 67 was a part of the general evolution. It hadbeen recognized that the slower and more rigid Army Supply Program had outlivedits usefulness. The period of the big buildup in forces was nearly over and theshape of offensive operations that led to victory was in view.
PLACING PURCHASE ORDERS
After determining the quantity of a needed item, the next stepin the procurement process was placing the order, either through competitivebidding or through negotiation. As in the prewar period, this function wasperformed in the field by procurement officers who were given broad authority inthe signing of contracts. In 1941, purchasing and contracting officers wereauthorized to approve contracts in amounts less than $500,000; during thefollowing year, the amount was increased to $1 million. Contracts which exceededthose limits had to receive the approval of The Surgeon General.5
Contract Negotiation
The system of plant allocation in use before the United Statesentered the war was quickly outmoded by plant conversions and by the enormouslyexpanded needs of the whole war program. Similarly, the Bidders' List ofprewar days became anachronistic when competitive bidding ceased to bemandatory. After the middle of 1940, the bulk of Medical Department purchasingwas by negotiated contract, in accordance with War Department policy whichauthorized the placement of orders without advertising for bids "in allcases where that method of procurement will expedite the accomplishment of thewar effort." During the first quarter of 1942, negotiated purchases totaled$25 million while contracts signed on the basis of competitive bidding amountedto less than $1 million.6
5Report on Administrative Developments, Control Division, OTSG, 1 Dec. 1942. [Official record.]
6(1) Memorandum, Under Secretary of War Robert P. Patterson to Chiefs of Services, 17 Dec. 1941 (P. & C. General Directive No. 81), subject: Decentralization of Procurement. (2) Hornbacher, Arthur: Report of Procurement Operations, 1 Jan.-31 Dec. 1942. [Official record.]
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Before actual negotiation of a contract, letters of intentwere frequently issued, which carried applicable preference rating and directedthat production be initiated before formal signing of the legal instruments. Newforms were devised in the New York Procurement Office, eliminating muchunnecessary material and speeding the placement of orders by 2 or 3 weeks.7
There was close coordination in the work of the variousdivisions of the New York Procurement Office. The Administration Divisionmaintained records of purchase authorizations and contracts; these were madeavailable to purchasing officers at regular intervals to inform each buyer as tothe procurement status of each item for which he was responsible. TheAdministration Division also reviewed open contracts to assure itself thatshipments were made as scheduled, and that they were received and acknowledgedby the depots. It was necessary, especially during 1943, to schedule productionso that scarce raw material could be made available for the items most urgentlyneeded. This involved care in making contracts and in stipulating delivery dateswhen the items contracted for were composed of critical raw materials. Eachcontract was analyzed, and realistic schedules were prepared to guide thecontractors in establishing their production schedules.8
To meet the war-expanded needs of the Medical Department, newcontract forms were devised and put into effect later in 1942. The mostimportant, War Department Contract Form No. SG 1, was used from September 1942until the end of the war for "formal contracts" involving procurementof medical supplies and equipment in amounts not exceeding $1.5 million.
For long-term supply contracts, the Medical Department usedWar Department Contract Form No. SG 2, which was put into effect in October1942. This form was not widely used at first, but it soon demonstrated itsvalue, especially in the procurement of surgical dressings and penicillin. Inthe contract, a price was fixed for a certain quantity to be delivered before astated date; the balance of the quantity under contract was to be delivered asneeds developed. The unit price of each delivery was to be fixed by agreementbetween contracting officer and contractor. In no instance, however, was theprice to increase more than 20 percent.
War Department Purchase Order Form No. SG 3 was used forprocurement of supplies, repairs, and services valued at less than $2,000, andsubsequently increased to $10,000. Known as an "informal contract"because it did not require the written acceptance of the contractor, this formexpedited the delivery of small purchases which were needed quickly.
For the peculiar problems involved in processing bloodplasma, a special contract was devised by the legal officers of the Army MedicalPurchasing Office. In addition to the special clauses, this contract containedall standard
7(1) Letter, Lt. Col. F. C. Tyng, MC, to Under Secretary of War, 22 Dec. 1941, subject: P. & C. General Directive No. 81, Office of the Under Secretary of War, December 17, 1941. (2) Hornbacher, Arthur: Purchasing Methods-Negotiations. [Official record.]
8See footnote 1(2), p. 36.
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provisions of the other contracts designed to protect theGovernment's interest.9
In devising these contract forms and in negotiating betweenbuyers and contractors, the legal officers of the procurement districts and,later, of the Army Medical Purchasing Office, took a prominent part. Theirservices were useful in the interpretation of statutes and procurementregulations, in the establishment of routines for the scrutiny of contracts, andin the interpretation and modification of contract provisions. One of the mostimportant tasks was to acquaint the contracting officers with the legallimitations upon their authority and with the embarrassments and complicationsthat would ensue if mistakes were made in the obligation of public funds.10
Price Analysis
Closely connected with the negotiation of contracts, priceanalysis and renegotiation were used by the Medical Department to controlprices. Late in 1943, the price analysis program began. With few exceptions,purchasing officers required contractors to include cost data on special formswhen submitting bids for orders in excess of $10,000. Most manufacturersvehemently opposed this method of doing business and, for a while, resisted allefforts of purchasing officers to obtain cost data. There were numeroustelephone calls and visits from contractors, who sought advice on how to fill inthe forms. Some declared that they did not know their costs. Others submittedbids without cost information. A few simply refused to bid. After much argumentand persuasion, purchasing officers succeeded in convincing the contractors thatthe new system did not aim to eliminate profits or to disseminate trade secrets,that its only object was to keep profits within reasonable limits and thus avoidrenegotiation. By spring of 1944, most Medical Department manufacturers werecooperating, and price analysis was in successful operation.11
As the cost data were examined by purchasing officers, proofwas available that considerable overpricing existed and that excessively largeprices were resulting. Only one item was analyzed in November 1943, but thatanalysis made possible a reduction of 1.2 percent in the quoted price and asaving of $1,036. During 1944, the number of items analyzed each month variedbetween 17 and 115 and showed a steady upward trend. Price reductions variedbetween 1.5 percent and 69 percent and totaled $1,657,027.30 for the year.During the first half of 1945, savings amounted to approximately $1.4 million.This is scarcely more than an indication, however, of the total savings effectedby price analysis. When a quoted price was reduced through analysis of costfigures, subsequent purchases were effected at the lowered figure. Thus, thesavings were cumulative and were much larger than the foregoing figuresindicated. It was observed, also, that price analysis effected economies inanother way. For example, when a manufacturer submitted a quotation on one occa-
9Hornbacher, Arthur: Purchasing Methods-Contracts, 1941-45. [Official record.]
10See footnote 1(2), p. 36.
11See footnote 1(2), p. 36.
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sion, he was requested to forward cost data. He complied and,at the same time, lowered his price. An analysis of the cost data resulted in afurther reduction. It is significant that the contract prices of MedicalDepartment items declined 24.4 percent during the period 1 July 1944 to 30 June1945.12
Renegotiation of Contracts
Renegotiation of contracts was another and more vigorousmethod of reducing the cost of medical supplies and equipment. Unlike priceanalysis, this was a remedy, not a preventive; it recouped excessive profitsafter completion of the contract and delivery of the supplies. Renegotiation wasbased upon the assumption that manufacturers, when producing new items ortremendously increased quantities of old items, could not foresee their costsand thus charged prices that resulted in excessive profits. But after thesupplies had been manufactured and delivered, cost data were available; then, itwas possible to determine the prices which should have been charged.Consequently, a literal renegotiation of contracts, with full information was atthe disposal of both the contractors and representatives of the RenegotiationDivision, Supply Service. It should not be assumed, however, that hard-and-fastrules were applied in these proceedings and that each contractor's profitswere reduced to the same percentage figure. If a contractor's costs were highand if he had made no sincere efforts to reduce them, the percentage of profitallowed was correspondingly reduced. But if he had kept down his costs, thepercentage allowed was higher. Contractors who had sustained losses or had madevery small profits on other governmental orders, might be permitted a largerprofit on the contract being renegotiated.
All pertinent circumstances and conditions were consideredand each case was settled on its own merits. The work required a thorough studyof a contractor's business with the Medical Department, including his costs,prices, profits, promptness in making deliveries, and corporate structure. Somecontractors showed a pronounced tendency to inflate their costs, and thus reducetheir percentage of profit, by including expenses having no direct relation tothe fulfillment of the contract. It was necessary, therefore, to exercise greatcare in determining the true costs.
The Renegotiation Division was established in July 1942 andcontinued in operation during the remainder of the war. During fiscal year 1943,it initiated renegotiation proceedings on 229 Medical Department contracts, ofwhich 82 were completed before the end of the fiscal year. These completed casesresulted in refunds amounting to approximately $4.5 million.
During fiscal year 1944, the number of cases increasedconsiderably, and refunds recovered amounted to $7.5 million, or 5.8 percent ofthe total purchases involved. Many companies assigned to the Surgeon General'sOffice were found to have realized no excessive profits and were accordinglycleared
12(1) See footnote 1(2), p. 36. (2) Annual Report, Army Service Forces, fiscal year 1945, p. 214. The overall decline in prices for the Army Service Forces during the same period was only 3.2 percent.
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without refunds or price adjustments. The companies thuscleared realized an average profit of 5.1 percent. The companies from whichrefunds were obtained had an unadjusted profit of 18.8 percent. This was reducedby 11.32 percent, leaving an adjusted profit of 8.5 percent. This trendcontinued during fiscal year 1945, in which more than 400 contracts wererenegotiated, with refunds amounting to nearly $10 million. The unadjustedprofit, 20 percent, was reduced after renegotiation to 10.17 percent. Thus,during the war period, renegotiation reduced Medical Department expenses morethan $20 million.13
No item of medical supply created more interest than bloodplasma, and none was pursued more vigorously by renegotiation officers.14The original price for processing the 250-cc. unit of blood plasma rangedfrom $6.75 to $7.50. As of 1 September 1942, the price varied between $4.35 and$7.25, the lower price being that of Eli Lilly and Co. In October 1942, Lillyreduced its price to $2.50 and voluntarily refunded $25,000 on past deliveries.An additional refund of $186,000 was made in February 1943. Since Lilly haddeclared that the price of $2.50 per unit represented its cost of production,exclusive of general expenses, renegotiation officers had reason to suspect thatother processors were making excessive profits. The situation was renderedserious by the fact that requirements were large and the necessary productiondepended upon public donations of blood. If excessive profits were revealed, theentire blood plasma program would be adversely affected.
The Renegotiation Division rightfully concluded that theblood plasma program required exceptional treatment to assure that no scandalhit the Medical Department over excessive profits. They proceeded cautiously,acquiring the help of outsiders to enhance accuracy of findings. Unit prices ofblood plasma declined sharply during the war period, the decline beingattributable to an undeterminable extent to increased volume of production andimprovement of techniques of accounting and reporting by the variouslaboratories, as well as attention to costs and profits.
Payments to Contractors
It was important in executing a contract to pay contractorspromptly when performance was complete. During the war, this was not alwaysdone. Before 1 January 1943, when a contract was issued, an Army finance officerwas designated to make payment, and a copy of the instrument was forwarded tothat office. After supplies were shipped, the contractor sent his invoices tothat finance office for matching with the receiving report from depots. Whenthese three documents-contract, invoice, and receiving report-were assem-
13Annual Reports of the Renegotiation Division, Supply Service, OTSG, 1944 and 1945. The 1945 report, used by Capt. Richard E. Yates, MAC, in the preparation of the first draft of this study, is no longer available. Closely related to renegotiation was enforcement of the Royalty Adjustment Act which eliminated excessive royalties on patents and resulted in the recovery of approximately $5 million on Medical Department contracts.
14Medical Department, United States Army. Blood Program in World War II. Washington: U.S. Government Printing Office, 1964.
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bled, the finance office drew a check in favor of the contractor againstMedical Department funds.
During the period of increased procurement in 1942, thissystem demonstrated flaws. In addition to the increased volume of work hamperingprompt payment, delays were attributable to tardiness of the depots inforwarding reports to the finance office and to loss of contractors' invoices.The main delay in payment, however, was caused by differences in quantityactually shipped by a contractor from that called for in the contract. If anover or short shipment had been made, the finance office would not pay theaccount until proper certification was made.
AID TO MANUFACTURERS
During the fiscal year ending 1 July 1942, contracts were placedwith 700 manufacturers. Although this represented a distinct increase overprevious years, it was dwarfed by the great expansion of the following year,when 2,500 Medical Department contractors held a total of 25,000 contracts. Thisincrease in the number of manufacturers was caused by the conversion of numerousfactories to the production of medical supplies, and by a much fuller use ofsmall manufacturing establishments-a development resulting, in part, frompressure exerted by the Smaller War Plants Corp. During fiscal year 1943-thepeak year for procurement-contracts placed with small war plants totaled $220million, or 56 percent of all Medical Department procurement. The remainingyears of the war witnessed no increase in the number of contractors nor anyconsiderable expansion of the size of plants, except those devoted to theproduction of penicillin, petrolatum dressings, artificial limbs, and mechanicalprophylactics.15
Plant Expansion
Even before the United States entered the war, the expansion ofmanufacturing facilities required financial aid from the Government-eitherloans from the Defense Plant Corp. or certificates of necessity, which allowedthe manufacturer to amortize the cost of expansion over a 5-year period orduring the course of the emergency, whichever was shorter. In 1940, a "verysmall percentage" of Medical Department facilities applied for certificatesof necessity, but during 1941, a considerably larger number sought to amortizetheir expansion in this manner. Working through the Under Secretary of War, theMedical Department used its influence to obtain the certificates of necessityfrom the Treasury Department. By the end of 1943, Medical Department contractorshad expanded their plants sufficiently to care for the abnormal needs of thewar, except in the production of litters, artificial limbs, penicillin, gasgangrene antitoxin, blood plasma, and other medical items which science
15(1) Annual Report, Supply Service, OTSG, 1943. (2) Annual Report of The Surgeon General for the Commanding General, ASF, 1943. (3) Annual Report, Liaison Branch, Purchases Division, Supply Service, OTSG, fiscal year 1945.
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developed and which the changing military situation required.Several penicillin plants, for example, were financed with public funds suppliedby the Defense Plant Corp., but the greater number were built by private capitalupon the basis of certificates of necessity. During the period 1 July 1943 to 30June 1944, 136 applications for the certificates were considered by the SupplyService and forwarded to higher authority. On each application, a report wasprepared showing the importance of the medical item to be produced, therelationship between requirements and existing facilities, and the suitabilityof the proposed facility.16
In addition to an increase in the number of contractors andthe expansion of plants, the production of urgently needed medical supplies wasaugmented by the establishment of the 24-hour workday and the 7-day week. Withinless than 10 days after the attack on Pearl Harbor, four great chemicalcompanies which produced raw materials for pharmaceuticals were put on a 24-hourday. Mills producing gray goods for surgical dressings had been on three shiftsfor several months, and the surgical instrument manufacturers had worked twoshifts per day for more than a year. Only lack of skilled personnel preventedthe addition of a third shift. The drug industry and other manufacturers ofcommercial-type items did not work to maximum capacity for their production wasmore than adequate for all Army requirements.17
Procurement officers of the Medical Department soondiscovered, however, that neither plant expansion nor an increase in the workdaycould insure the full production needed by the war effort. In the rapidlytightening economy, shortages of manpower, machine tools, and raw materials werebecoming increasingly acute. Consequently, an important duty of procurementofficers was to aid manufacturers in obtaining these essential components ofproduction.
Substitutions for Scarce Materials
The earliest and the most troublesome problem throughout thewar period grew out of the shortages of essential raw materials. Scarcities ofdrugs and metals which had previously been imported were anticipated and someprovision had been made for substitutes, but shortages in domestically producedraw materials were not expected. Mobilization plans did not envision a war ofsuch magnitude that the huge steel, copper, aluminum, and other materialresources of the United States would be inadequate. Early in 1942, however, itbecame clear that the mighty military effort then being developed would producesevere shortages in the three key metals as well as in many other raw materials.The remedies were obvious and were quickly applied. They consisted ofconservation and centralized control.
16(1) Memorandum, Lt. Col. C. F. Shook, MC, to Lt. Col. F. C. Tyng, MC, 1 Mar. 1941, subject: Report Upon Senate Resolution 71. (2) Annual Report, Liaison Branch, Purchase Division, Supply Service, OTSG, fiscal year 1944.
17Memorandum, Lt. Col. C. F. Shook, MC, to Maj. Charles J. Norman, Inf., 15 Dec. 1941, subject: Maximum Hours of Work.
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As shortage became apparent, specifications of MedicalDepartment items were revised wherever practicable to eliminate scarce rawmaterials. Hospital equipment and furniture, formerly made ofcorrosion-resistant steel, were constructed of iron, wood, and other lesscritical, but shorter-lived, substances. The laminated paper and lead foilcovering of the first aid packet proved superior to both the brass and steel itreplaced, but galvanized iron was less than satisfactory as a substitute forbrass in the manufacture of sterilizers. The plastics used instead of metals insuch items as food trays and bottle tops wore out faster than the more durablematerials originally used, as also did the enamelware that replaced stainlesssteel and aluminum in bedpans, cooking utensils, and other items of hospitalequipment. The litter pole, between early 1942 and the end of 1943, ran the fullcycle from aluminum to carbon steel to hardwood to laminated wood and back againto aluminum as productive capacity for that metal caught up with needs.18 Althoughvarious items of Medical Department supply suffered temporary loss in quality bysubstitution, the war effort as a whole gained impressive quantities of criticalmaterials (table 1).
TABLE 1.-Scarce materials saved by MedicalDepartment conservation measures, 1942-43
Material | Quantity saved (in pounds) | Material | Quantity saved (in pounds) | ||
Fiscal year 1942 | Fiscal year 1943 | Fiscal year 1942 | Fiscal year 1943 | ||
Aluminum | 186,333 | 102,000 | Lead | 8,142 | 0 |
Antimony | 2,497 | 150 | Manganese | 148 | 0 |
Brass | 148,482 | 0 | Nickel | 199,358 | 44,000 |
Bronze | 275 | 0 | Rubber | 372,787 | 2,985,000 |
Cadmium | 680 | 7,000 | Silk | 6,455 | 80,000 |
Chromium | 339,152 | 207,000 | Steel | 1,006,612 | 2,970,000 |
Copper | 4,685 | 777,500 | Tin | 263,320 | 584,000 |
Formica | 34,244 | 0 | Zinc | 0 | 6,000 |
SOURCE: Annual Reports, Finance and SupplyServices, Fiscal Years 1942 and 1943.
In addition to the conservation measures outlined, theMedical Department sought to relieve the raw materials shortages of itscontractors by obtaining high preference ratings from the War Production Boardand the Army and Navy Munitions Board. In these endeavors, the Department wasconfronted by an all-embracing system of raw materials control which, althoughit was not inflexible, could not often be changed to aid a single technicalservice (fig. 8).
It was not until 1944, when steel, aluminum, and copperbecame more abundant, that many of the unsatisfactory substitutes could beabandoned. At that time, the Medical Department launched a program which itdescribed as "reverse conservation." All specifications which had beenamended to permit the use of substitute materials were carefully revised, andvigorous requests
18(1) See footnotes 15(2), p. 45; and 16(2), p. 46. (2) Annual Report, Finance and Supply Services, OTSG, fiscal year 1942.
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were made for the raw materials of first choice. Within a fewmonths, brass shell sterilizers, aluminum pole litters, and stainless steelbedpans heralded the dawn of a more abundant day (fig. 9).19
ALLOCATION OF MATERIALS
The Priorities System
The original priorities system instituted in 1940 by the Armyand Navy Munitions Board established preference ratings based on the relativeurgency of certain military items. The top priority rating of A-1-a was given totanks. Airplanes were rated A-1-b, and other items, A-1-c through A-1-h. Medicalsupplies for the Army during this early period were rated A-1-d. These eightpriorities ratings, the only ones in existence in 1940, were issued exclusivelyto manufacturers by the Army and Navy Munitions Board. The granting of a ratingto a manufacturer gave him the right to place that rating on all orders for rawmaterials and component parts needed to complete the end item. Since this was asmall defense program rather than a large war program, no great difficulty wasencountered in filling rated orders. The remainder of the country's productionwas not affected, except for some delays in filling civilian orders.20
19See footnote 16(2), p. 46.
20This section on Allocation of Materials is based primarily on studies made by two procurement officers: (1) Capt. Devon A. Davis, MAC: Advent of New Procedures. Effect of Priorities on Procurement. [Official record.]; and (2) Maj. T. M. Salisbury, MAC: Priorities, Allocations, and Materials Control. [Official record.] Also consulted were the annual reports for the war years of the Supply Service, OTSG, and of the Army Medical Purchasing Office. The definitive study of the subject is Novick, David, Anshen, Melvin, and Truppner, W. C.: Wartime Production Controls. New York: Columbia University Press, 1949.
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The Medical Department prepared a critical and essential itemlist comprising about 1,000 of its 4,500 cataloged items for blanket coverage.As materials became scarcer, this list soon proved to be too restrictive, andspecial applications had to be used increasingly. In any event, the mere factthat the contractor had received the contract and his A-1-d preference ratingdid not mean that he could automatically procure the necessary raw materials. Hehad no more than a license to buy if and when he found the materials he needed,uncommitted to higher priority orders (fig. 10).
Another administrative handicap developed shortly after theinauguration of a preference rating system. Before its establishment, to exactprompt deliveries, most Medical Department contracts carried a liquidated damageclause affixing a penalty for items not delivered within the time specified.Potential contractors hesitated to accept preference rated contracts or orderscarrying a higher preference rating than those they were already processing, ifthey also contained this liquidated damage clause. To overcome this condition,the Secretary of War issued Procurement Circular No. 36, dated 23 October 1940,so that inclusion of the liquidated damage clause was applied only toexceptional cases or when no conflict was anticipated. Changes also
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authorized contracting officers to grant time extensions aswarranted by the facts in the case.
At the beginning of 1941, the Office of Production Managementwas established, and it soon assumed complete priorities control over certainscarce materials. Regulations were issued prohibiting producers from fillingcivilian orders until all rated orders had been completed. The preferenceratings, in addition, were greatly expanded. At the top level, two ratings wereadded: A-1-i and A-1-k. These were followed by a new level, A-2 through A-10, anda third level which consisted of two ratings, B-1 and B-2. From the verybeginning, however, the last two ratings were largely valueless, for the higherratings got the scarce materials and the factory space. Two methods were used inestablishing priority ratings: (1) the "blanket rating" extending apriority for certain kinds of items, thus rendering individual applicationsunnecessary; and (2) the ratings granted for individual orders or contracts. InJanuary 1942, the WPB (War Production Board) succeeded the Office of ProductionManagement and gradually assumed the priority functions previously exercised bythe Army and Navy Munitions Board.
Aside from frequent changes in organization, responsibility,and personnel, the greatest difficulty faced by the Medical Department indealing with the production agencies was the absence of any organizational groupfamiliar with the needs for health supplies. In dealing directly with themetallurgical group handling brass, for example, the Medical Departmentmanufacturer was apt to have his request for brass for use in sterilizers metwith a statement that the request represented so many cartridges. The earlyestablishment of a Health Supply Section in WPB, however, was a recognition ofthe special nature of health supplies and a guarantee that materials needed forthem would not be lightly or ignorantly denied.
The priorities system never attempted to balance the issuanceof preference ratings against the available supplies or raw materials. Indeed,the system was an attempt to find a substitute for balancing supply and demand,based on the theory that the relative urgency of different products wasaccurately reflected in the priorities. It made no difference, therefore, howmany preference ratings were issued; when the materials and resources wereexhausted, orders with a low rating would not be filled. For example, if enoughA-9 or higher ratings were issued to use up the entire available supply, noorders with ratings below A-9 would be filled; and, since all orders of A-9 orhigher were more urgent than lower orders, the objective of the system would beaccomplished.
This kind of balance was never achieved because of apronounced lack of uniformity in appraising urgency, and there was insufficientinformation upon which to base the appraisals. Who, in 1942, could declare withcertainty that trench mortars were more important than field X-ray machines? Ifsuch a declaration were made in January 1942, who could believe it would remainvalid throughout the succeeding months? This lack of faith in preference ratingssmoothed the way for a priorities race. When it became obvious that an
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A-3 contract could not be filled, there was a tendency torerate the contract. This, of course, made the plight of low ratings morehopeless than ever. Just after Pearl Harbor, for example, it appeared that theA-10 rating given to manufacturers of medical supplies and equipment was losingits effectiveness. Suppliers, fully occupied with higher ratings, were payingscant attention to A-10 orders. Before long, any rating below A-1, for steel,copper, or other critical materials, became valueless.
An attempt was made to solve this preference rating inflationby adding "superratings"-that is, by more inflation. AA was thefirst of the new ratings, added in 1941. By the end of the summer of 1942, manymanufacturers had their mills booked solidly in advance on nothing but A-1orders, and it became necessary to add a whole series of superratings, beginningwith AAA as the emergency rating and followed by AA-1, AA-2, AA-3, and AA-4.Within a few months, some ratings had become the victim of still furtherinflation, and it became obvious that priorities alone could not control theflow of scarce materials.
The Medical Department in particular had fared poorly underthe priorities system as then established. Its contractors, generally speaking,had received A-1-d preference ratings, while medical supply contractors of theNavy had the advantage of A-1-a ratings. This severe handicap was rendered stillmore serious by the fact that the Air Corps, Signal Corps, and OrdnanceDepartment had A-1-a ratings for critical materials. This rendered it virtuallyimpossible for Medical Department contractors to make deliveries withinreasonable periods of time when critical raw materials were required. Thisdifficulty was partly solved by the conservation measures described earlier, butthere were limits beyond which conservation could not be pushed. It becamenecessary, therefore, to appeal for higher preference ratings on urgently neededitems. In some instances, better "blanket" type ratings were assigned.In June 1942, an A-1-a rating was granted for all depot freight handlingequipment; at the same time, the Medical Department was authorized to give arating of A-1-a to 65 percent of its contracts, the estimated percentage of itspurchases which were being shipped overseas. This authorization also permittedthe use of the A-1-b rating for all metal components not rated A-1-a. This,naturally, was a distinct aid to Medical Department procurement, but it must beremembered that the superratings added in 1941 and 1942 rendered the A-1-arating far less valuable than formerly.
The Production Requirements Plan
Late in 1942, the priorities system was supplemented by theProduction Requirements Plan, which provided that every manufacturer using morethan $5,000 worth of certain scarce metals and metallic materials in a 3-monthperiod could obtain those metals only through allotments. An attempt was made tobalance those allotments against the available supply by giving a preferencerating to be used in obtaining the materials thus allotted.
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This plan was short-lived. The theory, while simple, seemedextremely complicated to manufacturers. The plan was not fully operative until 1October 1942, when it had become generally known that a different plan forcontrolling the flow of materials was being developed. The fundamental weaknessof the system, assuming that it had been given an opportunity to be thoroughlytested, was that the basis of allotting materials was the manufacturers' ownstatements of what they felt they needed for war production. Only at the topcould the needs of the war program be translated into allotments of materials tomanufacturers, not from the standpoint of what the manufacturers wanted aspermitted under the Production Requirements Plan.
The Controlled Materials Plan
The Production Requirements Plan had scarcely gone into effectbefore a new and more effective system was devised. Known as CMP (ControlledMaterials Plan), this system was first announced in November 1942 and was infull effect by July 1943. Under CMP, three key materials-carbon steel, copper,and aluminum-were allocated among approved programs submitted quarterly byseven claimant agencies, including the War and Navy Departments and WPB'sOffice of Civilian Supply. Each contractor submitted to the appropriate claimantagency a list of materials needed, with required dates of delivery. When allclaims were in, WPB divided the available supply of the three controlledmaterials among the claimant agencies, which in turn approved deliveries to thecontractors. If there were not enough materials to satisfy all claims, some ofthem were cut back until supply and demand were in balance. Under the prioritiessystem, only those with high ratings got anything at all; under CMP, allapproved programs got something although it might be less than requested.Materials other than steel, copper, and aluminum were distributed through thepriorities system and by means of conservation orders, but the old difficultieswere no longer experienced because the control of the basic materials served asa limiting factor on the use of others.
End items were divided into two groups, called "A"and "B" products. "B" products were those items regularlyproduced for civilian consumption, commonly called shelf or stock items, such asmotors, gages, microscopes, screws, bolts, and refrigerators. "A"products were classified as all end items not listed in the "B"products list, and included items not generally produced in quantity before thewar, such as tank's, guns, aircraft, and ships. However, for convenience,"B" items were sometimes treated as "A" products or viceversa with special permission from WPB.
Scheduling production-Since most Medical Departmentitems fabricated from controlled materials were regularly produced for civilianconsumption, they were treated as "B" products. However, a fewexceptions, such as X-ray darkroom tents, hospital beds, and gasoline burners,were classified as "A" items. Classifying Medical Department items as"B" products meant that responsibility for obtaining controlledmaterials requirements and passing
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allotments to prime contractors rested with the appropriateindustry branch in the Office of Civilian Supply.
The Controlled Materials Plan proved to be far superior toanything previously devised. Medical Department contractors encountered littledifficulty in obtaining allotments of controlled materials, especially if orderswere placed 60 days before the required delivery date. More difficulty wasencountered in obtaining electrical components such as motors, starters,transformers, meters, and high voltage wire; but where great need could beshown, assistance from WPB was obtained to expedite delivery.
Duties of the procurement officer-Under CMP and thepriorities system which accompanied it, Medical Department procurement officershad important duties. It was essential that the required production be scheduledso that items would be delivered when needed, and that scarce materials andrestricted manufacturing facilities were not devoted to the production of itemsuntil they were needed. Since requirements were never static and since plans foroverseas operations were frequently changed, this involved a continuous studyand control of production schedules. For example, scarce materials allotted tothe production of one item had to be speedily withdrawn when it was discoveredthat the production of another item had suddenly become more urgent. Procurementofficers found that their task, in this respect, resembled that of an engineerwho sits in a maze of pipes and opens and closes valves, thus directing the flowof critical materials to the areas that most needed them and restricting theflow to areas of less urgent need. A similar task was accomplished with thepriorities system. Each contract which involved the use of scarce materialsreceived a preference rating designed to supply the materials within the timelimits allowed by the contract. Frequent adjustments were necessary, however, asthe value of preference ratings fluctuated and as the comparative urgency ofdifferent production programs varied with the military situation. It wassometimes necessary to apply to WPB for emergency ratings to expedite a contractwhose speedy completion had suddenly become urgent.
Adjustment of contracts.-A considerable improvementin the authorized preference ratings facilitated operations and lessened theneed for individual pleas to WPB for relief. To counter further inflation ofpriority ratings, a priorities directive was issued on 15 December 1942permitting the Medical Department to rate 60 percent of its requirements foreach quarter AA-1 and 40 percent AA-2X, figured on the total value of allcontracts issued during this period. The procurement office thus determinedwhich contracts were to receive the higher priority. In general, those contractswhich covered items involving the more critical production materials or urgentlyneeded items were rated AA-1, while items not urgently needed or involvingnoncritical materials were rated AA-2X
The 15 December 1942 priorities directive permitted allcontracts involving the purchase of items for Russian Lend-Lease to be ratedAA-1, without
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being charged against the 60 percent AA-1, 40 percent AA-2Xpattern. In addition to buying and shipping direct under the Russianprotocol, some items were bought for the American Red Cross to be shipped bythat agency to Russia. Four blood plasma processing plants, incorporating thebest feature of several of the commercial processors, were examples.
The system put into effect by the December 1942 directiveworked smoothly for the Medical Department until the beginning of 1945, when thesupply situation began to change. Some materials, notably packing supplies, thatcould formerly be obtained with an AA-2X rating, required an AA-1 rating.Indeed, many suppliers refused to accept orders; or, if they did accept them,they could offer no assurance that delivery would be made on time because oflarge backlogs of AA-1 orders. As a result, it was necessary to give thehigher rating to contracts previously granted an AA-2X rating; obviously the60 percent AA-1, 40 percent AA-2X pattern was no longer adequate for MedicalDepartment requirements. Since the 60-40 ratio could not be improved, thealternative was to process through WPB each contract which required rerating,and to study carefully each new contract before rating it, thus seeking toconserve the AA-1 ratings.
This sudden tightening of materials was caused by severalfactors, the most important probably being the lack of sufficient manpower. Inaddition, a general relaxation occurred during the last quarter of 1944 when thewar in Europe appeared to be nearing its end. Contracts were drastically cutback or canceled, causing mills which produced materials to curtail production.In this situation, Medical Department contractors consumed their inventories andrefrained from restocking. When it was discovered that the war in Europe couldcontinue for months, a great procurement rush began. Army and Navy contractswere released calling for the quickest possible delivery, and contractors soughtto restore their inventories. This caused the mills and component manufacturersto be flooded with so many orders that 5 to 6 months' delivery time was notunusual. To deal with this situation, production directives and emergencypreference ratings were obtained from WPB to speed the completion of the mosturgent contracts.
Aid to contractors-In the meantime, procurementofficers of the Medical Department were aiding contractors by extending othertypes of assistance. Through the Production Service Branch of the Army MedicalPurchasing Office, contractors received the aid they required to make promptdeliveries. This aid most frequently took the form of higher preference ratings,but even when these were granted, many problems remained involving delivery ofwar materials and machinery, component parts, subcontracting service, and thelike. These were "trouble spots" existing in contractors' plants.
Fortunately, most production problems did not requiredetailed and painstaking study for their solution. A telephone call to themanufacturer of a component part, the supplier of raw materials, or agovernmental agency was often sufficient to solve a production problem.Sometimes a visit to a plant revealed
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a difficulty and rendered its solution possible.21Whatwas required in all instances, however, was a system that would keep track ofprogress and would inform procurement officers of all delays in production. The"Ten-Day Status of Procurement Report," developed early in 1943,served this purpose.
Each buyer was given, every 10 days, a complete r?sum? onthe status of all items for which he was responsible. This gave him a clearbasis for forecasting, placing additional contracts, scheduling, and expeditingthe completion of contracts already placed. Many production difficulties werebrought to the attention of the buyer, and thence to the Production ServiceBranch, through this report. For example, during fiscal year 1945, approximately50 manufacturing establishments were visited to determine the status ofproduction and to render aid when completion of contracts was delayed.22
MANPOWER PROBLEMS
Loss of Skilled Workers
Procurement officers exerted themselves, also, to assistmanufacturers with manpower problems, which became increasingly serious as the warprogressed. The operation of the Selective Service law had a constantlydisruptive effect upon Medical Department contractors, for skilled andsemiskilled workers, whose replacement was difficult, were regularly inductedinto the Armed Forces (fig. 11). Whenever the induction of a valuable worker wasthreatened, the contractor informed the procurement office, which immediatelysought an occupational deferment for the worker. Contact was made with the localSelective Service Board by telephone, by mail, and, in some instances, bypersonal visits. The worker's importance to the Medical Department contractorwas urged upon the board, and representations were made as to the essentialityof medical supplies. If the request for deferment was rejected by the localboard, the case was followed to the appeal board and, if necessary, to the StateSelective Service Director. When all these efforts failed, the chief of thelabor branch in the appropriate service command was urged to transfer the workerto the Enlisted Reserve Corps so that he could return to his factory and helpcomplete the contract, or at least train a replacement.
Early in the war, selective service officials were reluctantto grant occupational deferments, especially at the lower levels, to the workersof Medical Department contractors, for they understood little of the Department'swork and had even less information on the importance of medical supplies.Pressed by the necessity of filling their quotas and sensitive to ill-informedpublic criticism, the local boards inducted many skilled workers, whose lossdelayed the completion of contracts for vitally needed supplies. This difficultybecame especially troublesome in 1943, when local boards were "scraping thebottom
21Ingraham, N. K., and Hornbacher, Arthur: ProductionControl, General Difficulty. [Official
record.]
22Annual Report, Contractors Service Branch to PublicRelations Officer, Army Medical Purchasing Office, fiscal year 1945.
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FIGURE 11.-Woman operating forklift truck stacking boxes onpallets, St. Louis Medical Depot.
of the barrel" to fill the very heavy quotas demanded inthat year. By the latter part of 1943, however, the general public and thelocal boards were becoming more acquainted with the importance of medicalsupplies-a development caused largely by radio, newspaper, and magazineadvertisements. The attitude of local boards began to change and deferments weregranted in greater numbers. From November 1944 to May 1945, approximately 2,500deferments had been processed, and more than 1,100 deferments were granted.23
Labor Disputes
Labor officers also had to deal with strikes and thethreat of strikes, and with their normally attendant cause-wage disputes.Strikes were not actually prohibited by law, but the right to strike was firsthedged with the threat of public odium, then abridged by what amounted tocompulsory arbitration. The National Defense Mediation Board was created byExecutive order in
23(1) Evans, C. M., and Hornbacher,A.: Manpower. [Official record.] (2) See footnote 22, p. 56.
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March 1941. Although this board had no sanction but publicopinion and no tool but moral suasion, it made an enviable record in its 10 months of existence. It was succeeded in January1942 by the National War LaborBoard, with authority to "finally determine" labor disputes. The bigstick behind the soft words was the war powers of the President, who could anddid seize plants in which either labor or management was unwilling to abide bythe ruling of the National War Labor Board. The War Labor Disputes Act (Smith-ConnallyAct) of 25 June 1943 reaffirmed the President's power to take over essentialplants in which work had been, or was about to be, interrupted.
No manufacturer holding Medical Department contracts wasinvolved in such action, but the production of surgical and dentalinstruments had been delayed by strikes before the original mediation boardwas set up. To minimize such delays in the future, supply contracts by the fallof 1941 included the following paragraph:
"Whenever an actual or potential labor dispute isdelaying or threatens to delay the timely performance of this contract, theContractor will immediately give notice thereof to the Purchasing andContracting Office. Such notice shall include relevant information with respectto such dispute."24
INSPECTION OF MEDICAL SUPPLIES
Before 1943, medical supplies were inspected after purchasein a manner which had been followed for many years. When supplies werereceived at depots, samples were withdrawn and tested for compliance withspecifications. Samples of sterile solutions and products were forwarded to theFood and Drug Administration; other supplies which the depot was unable to testwere forwarded to the laboratories of the procurement officers, at either St.Louis, Mo., or New York. Until a favorable report had been received on samplessent away for testing, the stocks from which they were drawn were segregated andmade unavailable for issue. This system of inspection was satisfactory duringpeacetime. The quantities of supplies purchased were small, and they wereprocured from standard manufacturers who maintained adequate testinglaboratories and were well acquainted with Medical Department specifications. Nodifficulties proceeded from the delay in making supplies available for issuesince the depots maintained adequate stocks to meet all current demands. If ashipment of supplies failed to pass the tests, it could easily be replaced inample time.
As the size of the Army multiplied, the quantities of medical supplies purchased vastly increased. They were procured from a large number of manufacturers, some of whom had only recently converted their factories to war production. These new manufacturers were not thoroughly familiar with Medical Department specifications, and many did not possess adequate test-
24The quoted passage is from War Department Supply Contract Form No. 1, 16 Sept. 1941, Article 16.
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ing facilities. Rejection of medical supplies led to seriousembarrassments, for such rejections resulted in the loss of critical rawmaterials and the waste of valuable manufacturing space, labor, transportation,and packing supplies. It soon became obvious that the inspection of medicalsupplies upon delivery, if not accompanied by inspections during themanufacturing process, was a luxury that the Medical Department could ill affordduring the war.
In January 1943, an inspection section was established in theNew York Medical Department Procurement District. Inspectors who possessedtechnical training and experience in testing various types of medical supplieswere recruited and given still further training. The country was then dividedinto a number of areas, and the inspectors were assigned to the plants ofMedical Department contractors: 33 inspectors entered plants in the Greater NewYork City area; 18 were assigned to the Middle Atlantic area (including upstateNew York, Pennsylvania, Maryland, Ohio, and New Jersey); 9 were assigned to theNew England area; and 11 were assigned to the Western area. These plantinspectors served a threefold purpose: (1) to check the contractor'sinspection methods, (2) to determine compliance with contract specifications,and (3) to prevent shipment of substandard supplies to the depots.25
Occasionally, the inspectors observed inadvertent departuresfrom specifications, which were quickly corrected by grateful contractors. Attimes, also, the ambiguous wording of some specifications and purchasedescriptions led to different interpretations by contractors and inspectors.These were soon settled by reference to chief inspectors and procurementofficials. Perhaps the greatest difficulties arose when plant inspectorsapproved the shipment of urgently needed items which did not conform to alltechnical requirements of specifications, but which, nevertheless, were usableand suitable for their intended purpose. Those departures from specificationsconfused depot inspectors, who, although they had been informed of the newpolicy, returned a number of shipments on the grounds that they were too much atvariance with specifications. This friction and disagreement were especiallyimportant in regard to substandard surgical instruments. At length, a conferencein New York, attended by both plant and depot inspectors, established aprocedure which satisfied all. After June 1943, when depot inspectors refused toaccept a shipment approved by plant inspectors, the commanding officer of theArmy Medical Purchasing Office received reports from both inspectors andrendered a binding decision.
The system of plant inspections appears to have been anunqualified success. In 1943, approximately 800 plants located in 29 states wereserved by the inspectors; by the following year, the number of plants increasedto more than a thousand. The cost of the inspection was very modest-.103percent of the cost of supplies shipped in 1943, and .157 percent in 1944.
It has been indicated that the plant inspections supplementedrather than replaced the final inspections at the receiving depots. It should bemade clear,
25Pigott, John W., and Hornbacher, Arthur: Inspection. [Official record.]
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also, that employment of the testing laboratories of the Foodand Drug Administration and the Army Medical Purchasing Office continuedthroughout the war. In fact, the laboratory of the procurement office,transferred from Binghamton, N. Y., to New York in February 1943, was enlargedand equipped to perform examinations for both inspection and the developmentof specifications. In fiscal year 1944, 5,429 formal examinations were performedby this laboratory; in fiscal year 1945, the number was increased to 5,572.26
CONTRACT TERMINATION
In the fall of 1943 when it became apparent that there was tobe a large volume of contract terminations, the Legal Section undertook thedevelopment of procedures and policies for processing them. Contractmodifications were a trivial source of potential unpleasantness in comparisonwith terminations, and this wholly aside from the work devolving uponcontractors and purchasing officers alike. In time and labor, termination ofcontracts frequently exceeded the initial contracting effort tenfold.
Terminations continued all during the war, and cancellationsat the war's end were anticipated, but it is questionable that anyone foresawtheir magnitude. Every contract for more than $1,000 written by the MedicalDepartment during the war contained a clause providing that the Government couldcancel the contract at its option and, in that event, would pay the contractoron a fair and equitable basis for costs incurred. Until September 1943,terminations were on a relatively small scale, totaling approximately $22.5million, and were handled by the legal staff. Most cancellations stemmed fromthe substitution of newly developed items for obsolete items.
In September 1943, terminations had become so extensive thata Contract Termination Branch became a part of the Army Medical PurchasingOffice. Because of cutbacks in requirements on all classes of medical supplies,two large waves of terminations occurred in September 1943 and February 1944amounting to approximately $42.5 million.
It was recognized that the end of the war would automaticallycancel the need for much of the material under contract; the date, of course,was unpredictable. In July 1944, Congress turned its attention to this matterand, to safeguard the economic welfare of the Nation, passed the ContractSettlement Act of 1944, establishing as primary objectives: (1) settling ofterminations claims fairly and quickly; (2) prompt clearance of terminationinventory from war plants; and (3) provision of adequate interim financing forwar contractors pending settlements.
Training meetings were held in New York in June 1944 and inChicago in August 1944, with large numbers of medical contractors in attendance.In the Army Medical Purchasing Office, too, preparations moved apace to meetthis anticipated workload, including augmentation of the staff by additional
26(1) Annual Report, Procurement Division, New York MedicalDepot, fiscal year 1943. (2) Annual Report, Material Standards Division, ArmyMedical Purchasing Office, fiscal year 1945.
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accountants as well as plans for transferring personnel fromthe buying branches to the Termination Branch on V-E Day.
Other preparations were occurring simultaneously to minimizethe termination problem. In late 1944, as stocks accumulated and the WarDepartment became optimistic about an early conclusion of the war in Europe,procurement shifted from long-term to short-term contracts. Close attention waspaid to estimated future requirements. As a result of this policy, it wasnecessary to terminate only $11 million in contracts after V-E Day. Whenhostilities ceased in the Pacific, the entire procurement program was cut backaccording to plan and more than $54 million of Medical Department contracts werecanceled within 24 hours. For the entire war period, approximately 4,000different contracts involving $110 million in canceled contracts were processedand settled. Of this amount, $50 million was settled without cost to theGovernment.27
One of the more difficult problems of contract terminationwas disposition of items already completed but not yet delivered. It was atfirst determined that an attempt should be made to have the contractor keepthese items at a fair valuation. Otherwise, an attempt would be made to disposeof them to foreign governments or to such organizations as the Russian WarRelief and United Czechoslovakia Relief. Failing in these steps, the supplieswere then to be shipped to depot stocks. Subsequently, The Surgeon Generaldirected that all sales to the United Nations, including Russian War Relief,should be handled directly through the International Aid Division. A bulletin ofcompleted items in the hands of contractors was prepared and distributed tobusiness firms, relief societies, and other agencies. Considerable quantities ofsurgical instruments were sold to the U.S. Navy Department, and articles likekit pouches were sold to the Boy Scouts of America. Whenever practicable, thecontractor would make the sale, using the proceeds to reduce his terminationclaim. The whole problem was bound up with the larger problem of depot surplus.Contractors and potential purchasers hesitated to retain or buy terminatedsupplies when the threat of disposition of huge depot surpluses loomed.
Disposal of unfinished supplies also involved many difficultproblems. Frequently, unfinished items such as surgical instruments had no valueother than their scrap value. When critical material was obtained under thepriorities system for filling military orders, contractors could not use it formaking items for civilian consumption. To clear up this dilemma, a ruling wasobtained permitting contractors to use priority material for manufacture of enditems of the same type, even though these new items would ultimately be sold forcivilian consumption. If V-Loans were involved or if proceeds of the contractwere assigned to some bank, other complications naturally ensued.
Packing and packaging materials were in constantly shortsupply. When contracts were canceled, the packing materials thus made availablewere quickly redistributed among those contractors who, because of lack of these
27Termination of Contracts in the Medical Department. Bull. U.S. Army M. Dept. 6: 683-686, December 1946.
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materials, were delayed in completing their contracts.Transactions like these, of course, necessitated an abundance of financialadjusting.
From the foregoing, it can be readily seen that terminationswere time-consuming operations fraught with the possibility of bad publicrelations. The Medical Department settled all terminations incidental to the warwithout a single contractor's resorting to the contract appeal or disputemachinery of the War Department, nor was any case invalidated or suspended.Furthermore, 99 percent of these cases were settled within established timelimits.
