EDITORIAL COMMENT: The Serving Line

November 2011
Following the Rules

The Defense Logistics Agency (DLA) is the military's institutional commerce hub, sourcing and providing nearly 100 percent of the consumable items needed by the Army, Marine Corps, Navy and Air Force, as well as supporting other federal agencies.

Annual subsistence sales alone through its DLA Troop Support field activity exceeded $4.7 billion in fiscal 2010.

Throughout its history, DLA, including DLA Troop Support, has remained committed to refining its mission as the hub for cost-effective rapid, centralized, high-quality procurement.

In its commitment to that mission, however, DLA Troop Support appears to have overestimated the influence its purchasing power has when negotiating with distributors for the lowest price available.

Recently, the United States Federal Court of Claims decided that DLA Troop Support was too aggressive with its price-consciousness by setting “arbitrary and capricious terms” that departed from customary commercial practice.

A year ago, DLA Troop Support issued the first of a new series of 15 requests for proposals to provide food and beverage support across various geographic regions of the United States.

To achieve transparency in pricing and avoid fraud in procurement, the solicitation required shifting all elements regularly included in the delivered price to the distribution price, so that the delivered price represented the item's actual cost.

One step was executing a Class Waiver, which stated the reasons DLA Troop Support gave for justifying why certain provisions of the contracts were inconsistent with customer commercial practices.

Going a step further, DLA Troop Support included what the court termed a “Most Favored Customer” clause, which required contract bidders to give “the government the absolute lowest price, regardless of region or bargaining authority, on every item that they delivered.”

It is easy to understand where DLA Troop Support is coming from; it deals with taxpayer money and wants to be a good steward of the funds. It has been burnt a few times and wants to make sure it does not happen again. Companies balked, arguing that “Most Favored Customer” is usually granted only for similar customers based on guaranteed volume and/or location of sales.

In its decision, the court agreed with DLA Troop Support's rationale on the Class Waiver, but found that the Most Favored Customer clause “exceeds the bounds of rationality and amounts to an arbitrary and capricious requirement.”

DLA Troop Support deserves recognition for being aggressive about pursuing the best price, but it cannot overlook the fundamental rules of institutional commercial practices. It is a market maxim that distributors make their money on the buy, not necessarily the sell. The agency must accept that within the prime vendor system, “best price” must be negotiated — not mandated.