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sultation with the Congress. My idea is if we are going to do away with the Marine Corps, or merge it, we should do it congressionally and not by the Secretary of National Defense, and I think this gives him the widest measure of latitude for personal action without really going into the field where Congress ought to say “Yes” or “No." I think the Eberstadt proposal will do it.
Senator Byrd. Will that permit transfer of doctors and people like that?
The CHAIRMAN. That is right, for temporary and short periods of time and in limited numbers. What is your thought on it! Can we agree on that? That will remove the last vestige of this difficulty, I think.
Senator JOHNSON. I think it is an improvement, and I move it.
Senator CHAPMAN. I think that is as strong as the Congress would ever go along with.
The CHAIRMAN. I think we can defend this on the floor in good faith and probably carry it. Will the staff put that in?
Now, we will be glad to hear from Mr. McNeil as to his charts.
Mr. McNEIL. Chart No. 1 is an illustration of the present form of budget presentation.
The CHAIRMAN. You mean for the Army and Navy or any department?
Mr. McNeil. This is an example of the Navy budget taken out of the Federal budget document for fiscal year 1948.
The CHAIRMAN. By the Navy?
Mr. McNEIL. Just the Navy alone. It shows schedules of personnel and certain other tables but does not indicate the scope of the Navy program, its method of operation or what it expected to do.
Under the performance-type presentation of budgets to the Congress, the general budget summary would be presented in the manner shown on the next chart-chart No. 2. Each identifiable segment would be described in a short narrative, indicating the scope of the Navy program, what they expected to do and how they expected to do it.
The CHAIRMAN. That would be required under the bill?
The CHAIRMAN. So where they have nothing now but figures, they would have an explanation accompanying each major appropriation?
Mr. McNeil. Yes. The budget justifications would show the supporting detail by all identifiable activities. Accounting and reporting is simplified because there would be a single budget program for the operation of naval hospital—using the Hoover Commission examples. Reports would flow back to the source of funds, and it could be managed in an intelligent and understandable manner.
The CHAIRMAN. Mr. McNeil, I do not want to interrupt your presentation, but I would like to ask you a question. You have had long experience.
Assuming this is adopted and is given a fair chance to operate, from your knowledge of the services, what are the possibilities in dollars and cents of saving here?
Mr. McNEIL. I wish that it were possible to give you a reasonable estimate.
The CHAIRMAN. Of course, you will make a wild guess as anybody would, but what is your best judgment? Would it be 10 percent, 5 percent saving in the over-all picture, or 2 percent?
Mr. McNeil. Over a period of time we might attain, either through greater efficiency or actual dollar savings, 10 percent, perhaps, but it could only be accomplished over a period of years. This reorganization of fiscal management will improve the operation, the efficiency of management. It makes it possible better to manage the business affairs of the Military Establishment. Chart No. 3 illustrates the types of reports that would be helpful to management.
The CHAIRMAN. That would be as applied to the present. Assume we had had this in effect for 5 or 6 years. Assuming that, it would have been possible to save a billion and a half, as reflected against the present request of $15,000,000,000 budget. Ten percent of that would be one and one-half billion.
Mr. NcNEIL. I would like to say so, sir, but I would be going too far.
The CHAIRMAN. You are not in doubt at all that there would be very substantial savings if this is given a fair chanca?
Mr. MCNEIL. I am not in doubt at all. There would be substantial savings.
Chart No. 4 illustrates the present method of financing inventories, and I have used an Army example. The Navy today has a stock-fund operation. It has been operating for 54 years. It is one of the finest management tools any department has had.
This bill would provide the same facilities for the Army and Air Force. Chart No. 5 illustrates the plan of operations.
In general, we have many sources of funds financing inventories of common use or standard stock items. They are delivered to many inventory accounts. After items are delivered, they are no longer carried under dollar control. We do not know the end use of the material by dollar value, nor do we know the cost of material going into particular activities. Material is priced only when it it picked up and sold to another department, or delivered to a foreign government under an assistance act. Upon reimbursement, the funds are credited to what are known as replacing accounts. The funds then come back into the cycle for new procurement.
It is proposed to put such material under accounting and inventory control. Under the proposed plan the operation is controlled by two complete closed cycles.
The inventory is carried under a revolving stock fund. The capital of that fund includes the value of the inventory and the cash in the account. As material is issued from store, it must be paid for with appropriated moneys. Congress appropriates it for definite purposes. Therefore, the use of stores is controlled by the appropriation process.
When the material is withdrawn from store, the consuming activity pays for it, and the money goes into the cash account of the workingcapital funds.
The withdrawal of stores generates replenishment demands. Inventory control is based on established stock levels; for example, 6 months for some items, 9 months for other items. Inventory control involves the placing of orders only to maintain a certain inventory level. The orders are placed with the vendors; the material is delivered to the fund, and the vendors are paid from the working-capital account. You have completely closed cycles for over-all control.
The CHAIRMAN. The real control of that whole thing is your inventory.
Mr. MCNEIL. Inventory control plus appropriation control.
The CHAIRMAN. You have to have money, but the demand comes from inventory control.
Mr. McNEIL. That is correct, sir. Turning to working capital for industrial and commercial-type activities, chart No. 6 represents the type of operation with commercial concerns. If any activity of the Military Establishment places orders with private industry, orders are placed, delivery is made, and payment is made to the private concern, with the charge made to the budget program for which Congress made its original appropriation. It is a simple, clean transaction.
When, however, the order is placed with a Government plant, a different situation exists. The orders are placed with the plant being financed from numerous appropirations, the delivery is made, but we do not get any clean-cut charge. Appropriation accounting rather than cost accounting is emphasized in a plant.
Chart No. 7 shows some of the problems that are involved when appropriation allotments finance industrial operations. The New York shipyard is used as an example. Senator Johnson, as a matter of fact, was partly responsible for initiating this study as a reult of a report made by a subcommittee in the House in 1945, of which he was chairman.
After that report was released, we made a study of the best methods to finance industrial operations.
Chart No. 8 is another picture of the problems involved when financing industrial activities through the allotment process. Allotments from numerous sources finance the operation of industrial activities, and under the appropriation and allotment system of financing report back to each appropriation and each allotment must be made. We completely lose sight-at the appropriation level—of cost accounting and the cost of doing the job.
The CHAIRMAN. Now, is the installation of this system going to call for a very great increase in personnel in order to operate it in the three departments?
Mr. McNEIL. Actually, it should reduce it.
The CHAIRMAN. In other words, you can take the personnel and wed them over to this system and operate it without any new personnel
Mr. McNEIL. To accomplish cost accounting today in an industrial establishment the accounting job must be done twice: Once through the allotment process to appropriations and then the cost-acounting process accomplished separately.
The CHAIRMAN. We will be asked on the floor with regard to this. Obviously, if it will not require more but probably less personnel, it will require probably less expense to operate it as compared with the present system.
Mr. MCNEIL. It should take less expense and less personnel for this operation, as well as place the accounting emphasis on cost accounting so we can commence to evaluate the cost of work being done. That feature is an important part of the reorganization of fiscal management.
Chart No. 9 illustrates how working capital can simplify industrial operations. A single fund or single account would finance all opera
tions in a yard, with the capital account consisting of inventory, work in process, plus the cash necessary to pay bills until the industrial or commercial type activity can receive reimbursements from appropriations or from other agencies.
Chart No. 10 is very similar to the one which illustrated the operations of inventories under working capital. Again, in industrial activity, working capital consists of inventory, of jobs in process, and the cash necessary to operate until they can collect and receive reimbursement.
The Army, Navy, or Air Force, or any outside activity would place an order with an industrial or commercial activity. This activity would do the work, cost the job, and render a bill as a single item for the cost of doing the job to the appropriation and budget program concerned. The operation is clean, and would be comparable to the way we do business with private concerns.
Working capital would finance direct labor and materials, reimburse the stock fund for all items withdrawn from working capital funds or inventory accounts, cover applicable administrative expenses; all applicable costs would be included in the cost of jobs.
Under this operation we could know what it is costing to overhaul a destroyer, remove and replace a gun mount, or manufacture torpedoes.
Chart No. 11 illustrates the type of operation now necessary when a joint operation is financed from numerous different appropriations, such as the operation at Bikini or smaller joint operations. Management control is diluted because reports on allotments go back to each interested organizational division. We can centralize management control during the time that the operation is taking place and account back after the operation is completed, as shown on chart No. 12, providing a means for management control and simplifying reporting at the same time.
The CHAIRMAN. Mr. McNeil, I do not think the record would be complete without giving you on behalf of the committee and the chairman an especial vote of thanks for all your fine constructive effort to help bring about these needed reforms, and which I feel sure is going to mean not only more efficiency but greater economy. The committee is greatly indepted to you for your services.
Mr. EBERSTADT. May I add a word of thanks to Mr. McNeil for helping me.
Senator BYRD. Mr. Chairman, with your permission, I would like to have included in the record at this point an article printed in the Washington Post Friday, May 6, 1949, an article in regard to the Gallup poll headed “Sentiment 20–1 for adopting proposals of Hoover group.
The CHAIRMAN. Without objection, it will be included. (The article referred to is as follows:)
[From the Washington Post, May 6, 1949]
THE GALLUP POLL
SENTIMENT 20 to 1 FOR ADOPTING PROPOSALS OF HOOVER GROUP
(Second of two articles on public reaction to the Hoover Commission report.)
(By George Gallup, director, American Institute of Public Opinion) PRINCETON, N. J., May 5.-Voters who know about the Hoover Commission report for streamlining the executive branch of government are overwhelmingly in favor of putting the recommendations into effect.
Among those familiar with the recommendations, sentiment in favor of adopting them runs 20 to 1.
As of mid-April, with the campaign to publicize the report just getting under way, 41 percent of voters polled by the American Institute of Public Opinion said they had heard about the report and 28 percent had a correct understanding of its goal—to prevent waste, reduce cost, and streamline the operations of the executive branch of the Federal Government.
The poll results follow:
Have you heard or read anything about the Herbert Hoover Commission reports?
The national result and the results by education level follow:
41 76 45 27
59 24 55 73
What is your understanding, in general, of the purpose of the Hoover Commission?
The replies show that some of the people who say they have heard of the Commission are unable to explain the purpose of it. The vote falls into three categories as follows:
Percent Correct understanding (cut costs, prevent waste, etc.)
3 Don't know--
41 Haven't heard about Commission.-
59 The 28 percent who were familiar with the report were asked :
Would you like to see Congress carry out the main suggestions of the Hoover Commission's report, or not? The vote:
1 No opinion.
Total_ The CHAIRMAN. Now, the Chairman is going to take the liberty of asking the staff to get this bill in what we hope will be more or less final shape as soon as possible this afternoon.
I am going to try to have a meeting Tuesday morning at 10:30 to pass finally on this proposition.
Thank you all for contributing to this, I hope, happy result.
The CHAIRMAN. At this point, the following will be made a part of the proceedings:
(1) Address of Mr. Marx Leva, special assistant to the Secretary of Defense before the Joint Orientation Conference of the National Military Establishment.
(2) Organization Chart for National Security, as set forth in the National Security Act of 1947.
(3) Organization Chart for National Security, showing proposed amendments.
(4) Memorandum from Admiral Louis Denfeld, for the Joint Chiefs of Staff, dated March 25, 1949, to the Secretary of Defense.
(5) Memorandum from Secretary of Defense Forrestal, dated March 26, 1949, to the Joint Chiefs of Staff.