Pentagon Announces New Strategy for Combating Price Gougers: Paying Attention

The U.S. Department of Defense has a big problem with part suppliers who exploit government regulations over time to jack up the prices of products far above what it costs to make them, costing taxpayers millions of dollars more than they should have to pay for them. In particular, the firm TransDigm has been singled out for its business practices in this area.

But now, the Pentagon is going to start fighting back by doing something it has rarely done in its history: pay attention to what it is paying for the unique parts and equipment it needs to buy to ensure military readiness. Bloomberg‘s Anthony Capaccio has the story:

The Pentagon has created a “Cadre of Pricing Experts” to identify pricing trends for spare parts and suppliers that should be monitored to prevent a continued “assault on the American taxpayers,” according to chief weapons buyer Ellen Lord....

In a letter this month to Republican Senator Chuck Grassley, who had asked what was being done to curb abuses by companies with sole rights to parts, Lord, the undersecretary for acquisition, said the Defense Department “is actively investigating potential reverse engineering for over 1,000 sole source parts produced” by TransDigm and other companies “to create competitive alternatives and drive down prices for those parts.”

“Where the TransDigm situation is unique is that in the past few years, it has initiated and, in fact, accelerated, a corporate business model designed to acquire entities and the intellectual property rights to sole source spare parts, and then grossly increase the prices for those parts,” Lord wrote.

She said contracting officials are being told to “identify sellers who routinely refuse to provide cost information.”

It’s a start. As we saw with the story of the Air Force’s $1,200 coffee cup, the reverse-engineering approach can yield major savings. Unfortunately, the major problem with the DoD’s new “Cadre of Pricing Experts” is that they will be permanently in a reactionary position, forced to address cost escalations after they have already occurred.

To be proactive in controlling costs, the Defense Department must tackle parts that are produced by single-source vendors, where it should work to qualify multiple vendors to produce these critical items. The DoD can then use competition between vendors for a majority share of orders to contract reasonable prices for these parts.

The DoD can also sponsor new design competitions to create products that might replace the parts they identify as being at risk of having their cost inflated.

A combination of reactionary and proactive cost-control measures will go much further to benefit both U.S. taxpayers and military services than just paying attention to price changes alone.