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Chapter II

Contents

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 of medical supplies and equipment was still based on the depot replenishment system, modified to approximate the needs of an expanding army. Quantities purchased were sufficient to replenish depot stocks and to equip new troop units as they were raised, but the computation of maintenance and replacement needs had supply officers treading the thin ice of prophecy. There had been no experience to furnish guidelines for conjecture, and the procurement difficulties of 1940-41 were magnified as more and more men were brought under arms in the early months of 1942. Purchase authorizations were issued for such enormous quantities of some items that manufacturers were astounded at the size of the orders. Within a few weeks their judgment would be confirmed by cutbacks in procurement; but, very frequently, increased purchase authorizations would send total requirements to a new height. In other items, a hand-to-mouth policy would be adhered to, and a small purchase authorization would be issued. This would be followed by another and still another, until as many as 15 separate purchases 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 procurement programs of nearly all the technical services, the Army Supply Program was instituted in July 1942. Prepared each 6 months, this program for the Medical Department was a computation of quantities required in approximately 4,500 medical items. It was intended to present an orderly buying program, based upon carefully estimated requirements. Stop-and-go buying, which had so confused procurement in the earlier period, would be eliminated; and contractors would receive an overall picture of the Army's needs.

The Army Supply Program played a vital role in World War II logistics, going far to prevent confusion, duplication, and competition between Army and Navy and among the technical services; it provided a blueprint for military procurement planning. The Medical Department had a heavy stake in its success because medical supply cataloged a wide range of items common to one or more of the technical services and, of course, to the Navy. Under the Army Supply Program, the technical services could determine their respective requirements on the same troop basis, with a unified strategic plan in view. The program provided for purchasing on the authority of a single correlated


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program. From a complete absence of coordination between Army and 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 Department expenditures, the Army Supply Program still attempted to classify them by order of importance. In terms of raw materials, facilities, funds, and military necessity, some 300 Medical Department items were designated as "critical" and 400 as "essential." Beginning with the program of 1 August 1943, these two categories together became part A, defined as primarily tactical equipment, with an added part B consisting of "miscellaneous and expendable supplies." The Army Supply Program for calendar year 1944, as outlined in the 1 August 1943 document, listed Medical Department 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 1 February 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 heavy requirements for initial supply of the equipment type items that represented the bulk of part A. The part A items were about 4 percent of the total number of medical 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 of stability and steadiness that was reassuring. But it possessed one important disadvantage, which, within little more than a year and a half, caused the Medical Department to abandon it as a procurement objective. Since it was prepared at widely separated intervals (every 6 months), it could not keep step with changing needs. Moreover, the advance period being contracted for was from 1 year to 18 months. Because of this long lead time, items on which short supply developed were not given attention until the situation became serious. Similarly, where the issue rate was not so high as the Army Supply Program anticipated, excess stocks developed which made contract terminations necessary.1

The Delivery Needs Plan

To bring purchases more nearly in line with actual stock conditions, the Delivery Needs Plan was put into effect in the latter part of 1943. A Delivery Needs report was prepared at 2-month intervals by the Distribution and Requirements Division, Supply Service, based upon the requirements figures included in the Army Supply Program. The figures were adjusted, however, by subtracting from them the current stock-on-hand and due-in from procurement figures which were obtained from depots. Product of the skill and 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.


37

Needs Report was the first long step toward an integrated central stock control system. Initially, this was prepared manually in Stock Control by one officer and one clerk. It commenced with an electric accounting machine listing by item number and nomenclature. The source material, abstracted from the Distribution Work Sheets, consisted of the printed requirements, back orders on issue requisitions, and ready assets, which included stocks on hand or due-in by transfer. Dues-in from procurement were not included, but an effort was made to ascertain that dues-in from transfer were accurate. The printed requirements reflected 6 months' anticipated consumption, both domestic and overseas, and the level established to support the assembly and Medical Maintenance Unit programs.

The Delivery Needs Report also became the guide to procurement for items requiring expeditious action to speed up deliveries if contracts were in being, and similarly provided a list of items for which purchase action should be taken in the order of their urgency. A supplemental advantage was provision of a guide for establishment of delivery schedules, as it indicated the relative stock position of all items. This same feature of the report later provided means of identifying excesses and thus became a basis for procurement cutbacks.

Of greater importance and for the first time, Requirements, Procurement, and Stock Control personnel had a common point of reference by item, from which they could take action. As a byproduct, Resources personnel had available to them an item breakout from which they could better determine raw material needs. In those days of critical shortages and tight controls, the Delivery Needs Report provided invaluable detailed data for justification of Medical Department raw material requirements. The timely availability of medical supplies in the bitter fighting days of 1944-45 was largely the product of this simple practical device. The system was more successful than the Army Supply Program, which it closely approximated, except that changes in stock conditions were considered every 2 months; but, even with this improvement, it did not reflect changes in needs or stock conditions often enough to provide a reliable procurement program. The basic problem continued. Procurement was not being coordinated with needs as reflected in current issues.

Stock Level Purchasing

To solve the problem just described, the system of Stock Level Purchasing was instituted in February 1944, and continued in effect during the remainder of the war. Since this system depended upon close cooperation between stock control and procurement, the Inventory Control Branch was moved from Washington, D. C., to New York, N. Y., in November 1943, and the remainder of the Stock Control Division was subsequently transferred.

Stock Level Purchasing employed the same rates of call and the same maintenance factors used in the Army Supply Program, but the purchase requirements thus obtained were subject to frequent review and revision. The


38

object of the system was to maintain a predetermined stock level in all depots. New stocks of any item were ordered by the procurement office whenever it appeared that stocks on hand and on order, less probable issues during the period required for delivery (lagtime), would fall below the established level. The amount of each purchase was determined by a conference between the buyer and stock control officers, and it depended upon conditions affecting the manufacture of the item. When raw materials and manufacturing facilities were readily available, small purchases frequently repeated would be authorized. If the manufacturing process was difficult, a large quantity would be authorized for delivery scheduled over a longer period of time.

All items were reviewed monthly by an examination of the Consolidated Stock Report, which consisted of semimonthly stock reports of individual depots. In addition, specific items which were in short supply were reviewed more frequently. Thus, the shortest practicable time elapsed between development of a need and placing an item in procurement. The system also eliminated peakloads in purchasing activity because a relatively small number of items was purchased monthly. Since the period contracted for was reduced to a minimum, contract terminations became less frequent.2

The purchasing plan just described represented a return, in a modified form, to the Depot Replenishment System. Greatly improved recordkeeping and the more frequent submission of reports helped to make its operation smoother and its success more nearly complete, but the major difference was the issue experience that was now available on which to base purchase requirements. When experience was inadequate, serious difficulties still resulted. For example, during the first 9 months of 1944, the issue of Fraser's Solution-an iodine preparation used in the treatment of athlete's foot-was relatively small, approximating 10,000 bottles a month. In October 1944, with the launching of the Philippine campaign and the simultaneous arrival of the rainy season in the archipelago, requisitions increased so greatly that port shortages of considerable size began to appear. Purchases of the solution were immediately increased so that, by the end of November, 132,000 bottles were under contract for immediate delivery and an additional 250,000 bottles were ordered for delivery during the first 5 months of 1945. But, in the middle of December 1944, very large requisitions from overseas increased port shortages by 650,000 bottles. Since there had been so little previous activity in this item, the Supply Service was unable to cope with such heavy demands.3 Neither raw materials nor manufacturing facilities were available to produce the required quantities, and it was not until February 1945 that the situation was brought under control.

The Stock Level Purchasing System was satisfactory so long as there were no great and sudden fluctuations in issue; but there was always the possibility 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 would elapse before deliveries from contractors would replenish the supply. If a system of computing accurate requirements could have been developed, the problem would have been solved, but the available maintenance factors were too unreliable to guide procurement. As the war closed, maintenance factors based directly upon Zone of Interior and overseas issues were computed, in the hope of providing a sounder basis for the estimation of requirements during a future war.

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 point of origin. This change, instigated by the Inventory Control Branch, substantially increased the administrative workload of the Army Medical Purchasing Office because the cost of transportation from factory to depot varied with the location of each site.

On the other hand, under terms of F.O.B. destination, cost comparison by depot was relatively simple. Scheduling and destination, moreover, were part of the contract and, in general, one document accomplished all that was required from the buyer's viewpoint. Under F.O.B. origin terms, contracts specified quantity and shipping schedule in total, which required the buyer to maintain an open contract file and to contact the Inventory Control office 30 to 60 days before each scheduled shipping phase for the quantity breakout by specific depot.

Like the earlier modification of the Army Supply Program procedure by the Delivery Needs Report and the later substitution of the Stock Level 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 requirements on the basis of the most recent experience and scheduling deliveries against the latest stock position. Better distribution of stock by the depot was made in April, under F.O.B. origin contracts, than could have been made in the preceding January because 3 months' issue demands could drastically alter the depot stock position. Furthermore, last minute diversions of F.O.B. origin contracts could be effected with greater ease, and maximum benefits were gained by the use of Government bills of lading. Probably the most basic and lasting effect of F.O.B. origin contracts was involvement of buyers in operations, as part of the supply team.

Army Service Forces Circular No. 67

The Army Supply Program, which was revised on 1 February and 1 August of each year, was the basic requirements guide. With little or no warning, the Army Supply Program of 1 February 1944 was replaced by procedures contained 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 of procurement inventory, and disposal of excesses; and established a 30-day cycle of 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 initial supplies and maintenance for Army and Lend-Lease, plus Civil Affairs and any other known issue requirements; (2) total authorized stock level, which comprised depot stock levels in the Zone of Interior and in theaters of operations, 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 plus quantities on contracts undelivered; and (4) a determination of excesses where assets in (3) were greater than calculated requirements from (1) and (2).

Circular No. 67 was a part of the general evolution. It had been recognized that the slower and more rigid Army Supply Program had outlived its usefulness. The period of the big buildup in forces was nearly over and the shape of offensive operations that led to victory was in view.

PLACING PURCHASE ORDERS

After determining the quantity of a needed item, the next step in the procurement process was placing the order, either through competitive bidding or through negotiation. As in the prewar period, this function was performed in the field by procurement officers who were given broad authority in the signing of contracts. In 1941, purchasing and contracting officers were authorized to approve contracts in amounts less than $500,000; during the following year, the amount was increased to $1 million. Contracts which exceeded those limits had to receive the approval of The Surgeon General.5

Contract Negotiation

The system of plant allocation in use before the United States entered the war was quickly outmoded by plant conversions and by the enormously expanded needs of the whole war program. Similarly, the Bidders' List of prewar days became anachronistic when competitive bidding ceased to be mandatory. After the middle of 1940, the bulk of Medical Department purchasing was by negotiated contract, in accordance with War Department policy which authorized the placement of orders without advertising for bids "in all cases where that method of procurement will expedite the accomplishment of the war effort." During the first quarter of 1942, negotiated purchases totaled $25 million while contracts signed on the basis of competitive bidding amounted to 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 intent were frequently issued, which carried applicable preference rating and directed that production be initiated before formal signing of the legal instruments. New forms were devised in the New York Procurement Office, eliminating much unnecessary material and speeding the placement of orders by 2 or 3 weeks.7

There was close coordination in the work of the various divisions of the New York Procurement Office. The Administration Division maintained records of purchase authorizations and contracts; these were made available to purchasing officers at regular intervals to inform each buyer as to the procurement status of each item for which he was responsible. The Administration Division also reviewed open contracts to assure itself that shipments were made as scheduled, and that they were received and acknowledged by the depots. It was necessary, especially during 1943, to schedule production so that scarce raw material could be made available for the items most urgently needed. This involved care in making contracts and in stipulating delivery dates when the items contracted for were composed of critical raw materials. Each contract was analyzed, and realistic schedules were prepared to guide the contractors in establishing their production schedules.8

To meet the war-expanded needs of the Medical Department, new contract forms were devised and put into effect later in 1942. The most important, War Department Contract Form No. SG 1, was used from September 1942 until the end of the war for "formal contracts" involving procurement of medical supplies and equipment in amounts not exceeding $1.5 million.

For long-term supply contracts, the Medical Department used War Department Contract Form No. SG 2, which was put into effect in October 1942. This form was not widely used at first, but it soon demonstrated its value, especially in the procurement of surgical dressings and penicillin. In the contract, a price was fixed for a certain quantity to be delivered before a stated date; the balance of the quantity under contract was to be delivered as needs developed. The unit price of each delivery was to be fixed by agreement between contracting officer and contractor. In no instance, however, was the price to increase more than 20 percent.

War Department Purchase Order Form No. SG 3 was used for procurement of supplies, repairs, and services valued at less than $2,000, and subsequently increased to $10,000. Known as an "informal contract" because it did not require the written acceptance of the contractor, this form expedited the delivery of small purchases which were needed quickly.

For the peculiar problems involved in processing blood plasma, a special contract was devised by the legal officers of the Army Medical Purchasing Office. In addition to the special clauses, this contract contained all 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 the Government's interest.9

In devising these contract forms and in negotiating between buyers and contractors, the legal officers of the procurement districts and, later, of the Army Medical Purchasing Office, took a prominent part. Their services were useful in the interpretation of statutes and procurement regulations, in the establishment of routines for the scrutiny of contracts, and in the interpretation and modification of contract provisions. One of the most important tasks was to acquaint the contracting officers with the legal limitations upon their authority and with the embarrassments and complications that would ensue if mistakes were made in the obligation of public funds.10

Price Analysis

Closely connected with the negotiation of contracts, price analysis and renegotiation were used by the Medical Department to control prices. Late in 1943, the price analysis program began. With few exceptions, purchasing officers required contractors to include cost data on special forms when submitting bids for orders in excess of $10,000. Most manufacturers vehemently opposed this method of doing business and, for a while, resisted all efforts of purchasing officers to obtain cost data. There were numerous telephone calls and visits from contractors, who sought advice on how to fill in the forms. Some declared that they did not know their costs. Others submitted bids without cost information. A few simply refused to bid. After much argument and persuasion, purchasing officers succeeded in convincing the contractors that the 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 avoid renegotiation. By spring of 1944, most Medical Department manufacturers were cooperating, and price analysis was in successful operation.11

As the cost data were examined by purchasing officers, proof was available that considerable overpricing existed and that excessively large prices were resulting. Only one item was analyzed in November 1943, but that analysis made possible a reduction of 1.2 percent in the quoted price and a saving of $1,036. During 1944, the number of items analyzed each month varied between 17 and 115 and showed a steady upward trend. Price reductions varied between 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 effected by price analysis. When a quoted price was reduced through analysis of cost figures, subsequent purchases were effected at the lowered figure. Thus, the savings were cumulative and were much larger than the foregoing figures indicated. It was observed, also, that price analysis effected economies in another 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 a further reduction. It is significant that the contract prices of Medical Department items declined 24.4 percent during the period 1 July 1944 to 30 June 1945.12

Renegotiation of Contracts

Renegotiation of contracts was another and more vigorous method of reducing the cost of medical supplies and equipment. Unlike price analysis, this was a remedy, not a preventive; it recouped excessive profits after completion of the contract and delivery of the supplies. Renegotiation was based upon the assumption that manufacturers, when producing new items or tremendously increased quantities of old items, could not foresee their costs and thus charged prices that resulted in excessive profits. But after the supplies had been manufactured and delivered, cost data were available; then, it was possible to determine the prices which should have been charged. Consequently, a literal renegotiation of contracts, with full information was at the disposal of both the contractors and representatives of the Renegotiation Division, Supply Service. It should not be assumed, however, that hard-and-fast rules were applied in these proceedings and that each contractor's profits were reduced to the same percentage figure. If a contractor's costs were high and if he had made no sincere efforts to reduce them, the percentage of profit allowed was correspondingly reduced. But if he had kept down his costs, the percentage allowed was higher. Contractors who had sustained losses or had made very small profits on other governmental orders, might be permitted a larger profit on the contract being renegotiated.

All pertinent circumstances and conditions were considered and each case was settled on its own merits. The work required a thorough study of a contractor's business with the Medical Department, including his costs, prices, profits, promptness in making deliveries, and corporate structure. Some contractors showed a pronounced tendency to inflate their costs, and thus reduce their percentage of profit, by including expenses having no direct relation to the fulfillment of the contract. It was necessary, therefore, to exercise great care in determining the true costs.

The Renegotiation Division was established in July 1942 and continued in operation during the remainder of the war. During fiscal year 1943, it initiated renegotiation proceedings on 229 Medical Department contracts, of which 82 were completed before the end of the fiscal year. These completed cases resulted in refunds amounting to approximately $4.5 million.

During fiscal year 1944, the number of cases increased considerably, and refunds recovered amounted to $7.5 million, or 5.8 percent of the total purchases involved. Many companies assigned to the Surgeon General's Office were found to have realized no excessive profits and were accordingly cleared

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 thus cleared realized an average profit of 5.1 percent. The companies from which refunds were obtained had an unadjusted profit of 18.8 percent. This was reduced by 11.32 percent, leaving an adjusted profit of 8.5 percent. This trend continued during fiscal year 1945, in which more than 400 contracts were renegotiated, with refunds amounting to nearly $10 million. The unadjusted profit, 20 percent, was reduced after renegotiation to 10.17 percent. Thus, during the war period, renegotiation reduced Medical Department expenses more than $20 million.13

No item of medical supply created more interest than blood plasma, and none was pursued more vigorously by renegotiation officers.14 The original price for processing the 250-cc. unit of blood plasma ranged from $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, Lilly reduced 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 had declared that the price of $2.50 per unit represented its cost of production, exclusive of general expenses, renegotiation officers had reason to suspect that other processors were making excessive profits. The situation was rendered serious by the fact that requirements were large and the necessary production depended upon public donations of blood. If excessive profits were revealed, the entire blood plasma program would be adversely affected.

The Renegotiation Division rightfully concluded that the blood plasma program required exceptional treatment to assure that no scandal hit the Medical Department over excessive profits. They proceeded cautiously, acquiring the help of outsiders to enhance accuracy of findings. Unit prices of blood plasma declined sharply during the war period, the decline being attributable to an undeterminable extent to increased volume of production and improvement of techniques of accounting and reporting by the various laboratories, as well as attention to costs and profits.

Payments to Contractors

It was important in executing a contract to pay contractors promptly when performance was complete. During the war, this was not always done. Before 1 January 1943, when a contract was issued, an Army finance officer was designated to make payment, and a copy of the instrument was forwarded to that office. After supplies were shipped, the contractor sent his invoices to that finance office for matching with the receiving report from depots. When these 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 against Medical Department funds.

During the period of increased procurement in 1942, this system demonstrated flaws. In addition to the increased volume of work hampering prompt payment, delays were attributable to tardiness of the depots in forwarding reports to the finance office and to loss of contractors' invoices. The main delay in payment, however, was caused by differences in quantity actually shipped by a contractor from that called for in the contract. If an over or short shipment had been made, the finance office would not pay the account until proper certification was made.

AID TO MANUFACTURERS

During the fiscal year ending 1 July 1942, contracts were placed with 700 manufacturers. Although this represented a distinct increase over previous 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. This increase in the number of manufacturers was caused by the conversion of numerous factories to the production of medical supplies, and by a much fuller use of small manufacturing establishments-a development resulting, in part, from pressure exerted by the Smaller War Plants Corp. During fiscal year 1943-the peak year for procurement-contracts placed with small war plants totaled $220 million, or 56 percent of all Medical Department procurement. The remaining years of the war witnessed no increase in the number of contractors nor any considerable expansion of the size of plants, except those devoted to the production of penicillin, petrolatum dressings, artificial limbs, and mechanical prophylactics.15

Plant Expansion

Even before the United States entered the war, the expansion of manufacturing facilities required financial aid from the Government-either loans from the Defense Plant Corp. or certificates of necessity, which allowed the manufacturer to amortize the cost of expansion over a 5-year period or during the course of the emergency, whichever was shorter. In 1940, a "very small percentage" of Medical Department facilities applied for certificates of necessity, but during 1941, a considerably larger number sought to amortize their expansion in this manner. Working through the Under Secretary of War, the Medical Department used its influence to obtain the certificates of necessity from the Treasury Department. By the end of 1943, Medical Department contractors had expanded their plants sufficiently to care for the abnormal needs of the war, except in the production of litters, artificial limbs, penicillin, gas gangrene 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 supplied by the Defense Plant Corp., but the greater number were built by private capital upon the basis of certificates of necessity. During the period 1 July 1943 to 30 June 1944, 136 applications for the certificates were considered by the Supply Service and forwarded to higher authority. On each application, a report was prepared showing the importance of the medical item to be produced, the relationship between requirements and existing facilities, and the suitability of the proposed facility.16

In addition to an increase in the number of contractors and the expansion of plants, the production of urgently needed medical supplies was augmented by the establishment of the 24-hour workday and the 7-day week. Within less than 10 days after the attack on Pearl Harbor, four great chemical companies which produced raw materials for pharmaceuticals were put on a 24-hour day. Mills producing gray goods for surgical dressings had been on three shifts for several months, and the surgical instrument manufacturers had worked two shifts per day for more than a year. Only lack of skilled personnel prevented the addition of a third shift. The drug industry and other manufacturers of commercial-type items did not work to maximum capacity for their production was more than adequate for all Army requirements.17

Procurement officers of the Medical Department soon discovered, however, that neither plant expansion nor an increase in the workday could insure the full production needed by the war effort. In the rapidly tightening economy, shortages of manpower, machine tools, and raw materials were becoming increasingly acute. Consequently, an important duty of procurement officers was to aid manufacturers in obtaining these essential components of production.

Substitutions for Scarce Materials

The earliest and the most troublesome problem throughout the war period grew out of the shortages of essential raw materials. Scarcities of drugs and metals which had previously been imported were anticipated and some provision had been made for substitutes, but shortages in domestically produced raw materials were not expected. Mobilization plans did not envision a war of such magnitude that the huge steel, copper, aluminum, and other material resources of the United States would be inadequate. Early in 1942, however, it became clear that the mighty military effort then being developed would produce severe shortages in the three key metals as well as in many other raw materials. The remedies were obvious and were quickly applied. They consisted of conservation 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 Medical Department items were revised wherever practicable to eliminate scarce raw materials. Hospital equipment and furniture, formerly made of corrosion-resistant steel, were constructed of iron, wood, and other less critical, but shorter-lived, substances. The laminated paper and lead foil covering of the first aid packet proved superior to both the brass and steel it replaced, but galvanized iron was less than satisfactory as a substitute for brass in the manufacture of sterilizers. The plastics used instead of metals in such items as food trays and bottle tops wore out faster than the more durable materials originally used, as also did the enamelware that replaced stainless steel and aluminum in bedpans, cooking utensils, and other items of hospital equipment. The litter pole, between early 1942 and the end of 1943, ran the full cycle from aluminum to carbon steel to hardwood to laminated wood and back again to aluminum as productive capacity for that metal caught up with needs.18 Although various items of Medical Department supply suffered temporary loss in quality by substitution, the war effort as a whole gained impressive quantities of critical materials (table 1).

TABLE 1.-Scarce materials saved by Medical Department 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 Supply Services, Fiscal Years 1942 and 1943.

In addition to the conservation measures outlined, the Medical Department sought to relieve the raw materials shortages of its contractors by obtaining high preference ratings from the War Production Board and the Army and Navy Munitions Board. In these endeavors, the Department was confronted by an all-embracing system of raw materials control which, although it was not inflexible, could not often be changed to aid a single technical service (fig. 8).

It was not until 1944, when steel, aluminum, and copper became more abundant, that many of the unsatisfactory substitutes could be abandoned. At that time, the Medical Department launched a program which it described as "reverse conservation." All specifications which had been amended to permit the use of substitute materials were carefully revised, and vigorous 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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FIGURE 8.-Steps in the production of surgical steel instruments included forging, milling, and a number of skilled benchwork handcraft operations, such as the hand polishing operations depicted. (Photographs, courtesy J. Sklar Manufacturing Co., Long Island, N.Y.)


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FIGURE 9.-Litter, Folding, Aluminum, was one of eight different kinds of field litters covered by separate specifications and carried in depot stocks during World War II.

were made for the raw materials of first choice. Within a few months, brass shell sterilizers, aluminum pole litters, and stainless steel bedpans 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 Army and Navy Munitions Board established preference ratings based on the relative urgency of certain military items. The top priority rating of A-1-a was given to tanks. Airplanes were rated A-1-b, and other items, A-1-c through A-1-h. Medical supplies for the Army during this early period were rated A-1-d. These eight priorities ratings, the only ones in existence in 1940, were issued exclusively to manufacturers by the Army and Navy Munitions Board. The granting of a rating to a manufacturer gave him the right to place that rating on all orders for raw materials and component parts needed to complete the end item. Since this was a small defense program rather than a large war program, no great difficulty was encountered in filling rated orders. The remainder of the country's production was 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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FIGURE 10.-Manufacturing transformer components for X-ray machines. Cable insert wells are being fabricated on the right; transformer coils, in the center.

The Medical Department prepared a critical and essential item list 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, and special applications had to be used increasingly. In any event, the mere fact that the contractor had received the contract and his A-1-d preference rating did not mean that he could automatically procure the necessary raw materials. He had 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 the inauguration of a preference rating system. Before its establishment, to exact prompt deliveries, most Medical Department contracts carried a liquidated damage clause affixing a penalty for items not delivered within the time specified. Potential contractors hesitated to accept preference rated contracts or orders carrying a higher preference rating than those they were already processing, if they 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 to exceptional cases or when no conflict was anticipated. Changes also


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authorized contracting officers to grant time extensions as warranted by the facts in the case.

At the beginning of 1941, the Office of Production Management was established, and it soon assumed complete priorities control over certain scarce materials. Regulations were issued prohibiting producers from filling civilian orders until all rated orders had been completed. The preference ratings, in addition, were greatly expanded. At the top level, two ratings were added: A-1-i and A-1-k. These were followed by a new level, A-2 through A-10, and a third level which consisted of two ratings, B-1 and B-2. From the very beginning, however, the last two ratings were largely valueless, for the higher ratings got the scarce materials and the factory space. Two methods were used in establishing priority ratings: (1) the "blanket rating" extending a priority for certain kinds of items, thus rendering individual applications unnecessary; and (2) the ratings granted for individual orders or contracts. In January 1942, the WPB (War Production Board) succeeded the Office of Production Management and gradually assumed the priority functions previously exercised by the Army and Navy Munitions Board.

Aside from frequent changes in organization, responsibility, and personnel, the greatest difficulty faced by the Medical Department in dealing with the production agencies was the absence of any organizational group familiar with the needs for health supplies. In dealing directly with the metallurgical group handling brass, for example, the Medical Department manufacturer was apt to have his request for brass for use in sterilizers met with a statement that the request represented so many cartridges. The early establishment of a Health Supply Section in WPB, however, was a recognition of the special nature of health supplies and a guarantee that materials needed for them would not be lightly or ignorantly denied.

The priorities system never attempted to balance the issuance of 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 was accurately reflected in the priorities. It made no difference, therefore, how many preference ratings were issued; when the materials and resources were exhausted, orders with a low rating would not be filled. For example, if enough A-9 or higher ratings were issued to use up the entire available supply, no orders with ratings below A-9 would be filled; and, since all orders of A-9 or higher were more urgent than lower orders, the objective of the system would be accomplished.

This kind of balance was never achieved because of a pronounced lack of uniformity in appraising urgency, and there was insufficient information upon which to base the appraisals. Who, in 1942, could declare with certainty that trench mortars were more important than field X-ray machines? If such a declaration were made in January 1942, who could believe it would remain valid throughout the succeeding months? This lack of faith in preference ratings smoothed 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 to rerate the contract. This, of course, made the plight of low ratings more hopeless than ever. Just after Pearl Harbor, for example, it appeared that the A-10 rating given to manufacturers of medical supplies and equipment was losing its effectiveness. Suppliers, fully occupied with higher ratings, were paying scant 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 inflation by adding "superratings"-that is, by more inflation. AA was the first of the new ratings, added in 1941. By the end of the summer of 1942, many manufacturers had their mills booked solidly in advance on nothing but A-1 orders, and it became necessary to add a whole series of superratings, beginning with 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 further inflation, and it became obvious that priorities alone could not control the flow of scarce materials.

The Medical Department in particular had fared poorly under the priorities system as then established. Its contractors, generally speaking, had received A-1-d preference ratings, while medical supply contractors of the Navy had the advantage of A-1-a ratings. This severe handicap was rendered still more serious by the fact that the Air Corps, Signal Corps, and Ordnance Department had A-1-a ratings for critical materials. This rendered it virtually impossible for Medical Department contractors to make deliveries within reasonable periods of time when critical raw materials were required. This difficulty was partly solved by the conservation measures described earlier, but there were limits beyond which conservation could not be pushed. It became necessary, therefore, to appeal for higher preference ratings on urgently needed items. In some instances, better "blanket" type ratings were assigned. In June 1942, an A-1-a rating was granted for all depot freight handling equipment; at the same time, the Medical Department was authorized to give a rating of A-1-a to 65 percent of its contracts, the estimated percentage of its purchases which were being shipped overseas. This authorization also permitted the 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 be remembered that the superratings added in 1941 and 1942 rendered the A-1-a rating far less valuable than formerly.

The Production Requirements Plan

Late in 1942, the priorities system was supplemented by the Production Requirements Plan, which provided that every manufacturer using more than $5,000 worth of certain scarce metals and metallic materials in a 3-month period could obtain those metals only through allotments. An attempt was made to balance those allotments against the available supply by giving a preference rating to be used in obtaining the materials thus allotted.


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This plan was short-lived. The theory, while simple, seemed extremely complicated to manufacturers. The plan was not fully operative until 1 October 1942, when it had become generally known that a different plan for controlling the flow of materials was being developed. The fundamental weakness of the system, assuming that it had been given an opportunity to be thoroughly tested, was that the basis of allotting materials was the manufacturers' own statements of what they felt they needed for war production. Only at the top could the needs of the war program be translated into allotments of materials to manufacturers, not from the standpoint of what the manufacturers wanted as permitted under the Production Requirements Plan.

The Controlled Materials Plan

The Production Requirements Plan had scarcely gone into effect before a new and more effective system was devised. Known as CMP (Controlled Materials Plan), this system was first announced in November 1942 and was in full effect by July 1943. Under CMP, three key materials-carbon steel, copper, and aluminum-were allocated among approved programs submitted quarterly by seven claimant agencies, including the War and Navy Departments and WPB's Office of Civilian Supply. Each contractor submitted to the appropriate claimant agency a list of materials needed, with required dates of delivery. When all claims were in, WPB divided the available supply of the three controlled materials among the claimant agencies, which in turn approved deliveries to the contractors. If there were not enough materials to satisfy all claims, some of them were cut back until supply and demand were in balance. Under the priorities system, only those with high ratings got anything at all; under CMP, all approved programs got something although it might be less than requested. Materials other than steel, copper, and aluminum were distributed through the priorities system and by means of conservation orders, but the old difficulties were no longer experienced because the control of the basic materials served as a limiting factor on the use of others.

End items were divided into two groups, called "A" and "B" products. "B" products were those items regularly produced for civilian consumption, commonly called shelf or stock items, such as motors, 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 the war, such as tank's, guns, aircraft, and ships. However, for convenience, "B" items were sometimes treated as "A" products or vice versa with special permission from WPB.

Scheduling production-Since most Medical Department items fabricated from controlled materials were regularly produced for civilian consumption, they were treated as "B" products. However, a few exceptions, 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 controlled materials requirements and passing


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allotments to prime contractors rested with the appropriate industry branch in the Office of Civilian Supply.

The Controlled Materials Plan proved to be far superior to anything previously devised. Medical Department contractors encountered little difficulty in obtaining allotments of controlled materials, especially if orders were placed 60 days before the required delivery date. More difficulty was encountered in obtaining electrical components such as motors, starters, transformers, meters, and high voltage wire; but where great need could be shown, assistance from WPB was obtained to expedite delivery.

Duties of the procurement officer-Under CMP and the priorities system which accompanied it, Medical Department procurement officers had important duties. It was essential that the required production be scheduled so that items would be delivered when needed, and that scarce materials and restricted manufacturing facilities were not devoted to the production of items until they were needed. Since requirements were never static and since plans for overseas operations were frequently changed, this involved a continuous study and control of production schedules. For example, scarce materials allotted to the production of one item had to be speedily withdrawn when it was discovered that the production of another item had suddenly become more urgent. Procurement officers found that their task, in this respect, resembled that of an engineer who sits in a maze of pipes and opens and closes valves, thus directing the flow of critical materials to the areas that most needed them and restricting the flow to areas of less urgent need. A similar task was accomplished with the priorities system. Each contract which involved the use of scarce materials received a preference rating designed to supply the materials within the time limits allowed by the contract. Frequent adjustments were necessary, however, as the value of preference ratings fluctuated and as the comparative urgency of different production programs varied with the military situation. It was sometimes necessary to apply to WPB for emergency ratings to expedite a contract whose speedy completion had suddenly become urgent.

Adjustment of contracts.-A considerable improvement in the authorized preference ratings facilitated operations and lessened the need for individual pleas to WPB for relief. To counter further inflation of priority ratings, a priorities directive was issued on 15 December 1942 permitting the Medical Department to rate 60 percent of its requirements for each quarter AA-1 and 40 percent AA-2X, figured on the total value of all contracts issued during this period. The procurement office thus determined which contracts were to receive the higher priority. In general, those contracts which covered items involving the more critical production materials or urgently needed items were rated AA-1, while items not urgently needed or involving noncritical materials were rated AA-2X

The 15 December 1942 priorities directive permitted all contracts involving the purchase of items for Russian Lend-Lease to be rated AA-1, without


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being charged against the 60 percent AA-1, 40 percent AA-2X pattern. In addition to buying and shipping direct under the Russian protocol, some items were bought for the American Red Cross to be shipped by that agency to Russia. Four blood plasma processing plants, incorporating the best feature of several of the commercial processors, were examples.

The system put into effect by the December 1942 directive worked smoothly for the Medical Department until the beginning of 1945, when the supply situation began to change. Some materials, notably packing supplies, that could 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 of large backlogs of AA-1 orders. As a result, it was necessary to give the higher rating to contracts previously granted an AA-2X rating; obviously the 60 percent AA-1, 40 percent AA-2X pattern was no longer adequate for Medical Department requirements. Since the 60-40 ratio could not be improved, the alternative was to process through WPB each contract which required rerating, and to study carefully each new contract before rating it, thus seeking to conserve the AA-1 ratings.

This sudden tightening of materials was caused by several factors, the most important probably being the lack of sufficient manpower. In addition, a general relaxation occurred during the last quarter of 1944 when the war in Europe appeared to be nearing its end. Contracts were drastically cut back or canceled, causing mills which produced materials to curtail production. In this situation, Medical Department contractors consumed their inventories and refrained from restocking. When it was discovered that the war in Europe could continue for months, a great procurement rush began. Army and Navy contracts were released calling for the quickest possible delivery, and contractors sought to restore their inventories. This caused the mills and component manufacturers to be flooded with so many orders that 5 to 6 months' delivery time was not unusual. To deal with this situation, production directives and emergency preference ratings were obtained from WPB to speed the completion of the most urgent contracts.

Aid to contractors-In the meantime, procurement officers of the Medical Department were aiding contractors by extending other types of assistance. Through the Production Service Branch of the Army Medical Purchasing Office, contractors received the aid they required to make prompt deliveries. This aid most frequently took the form of higher preference ratings, but even when these were granted, many problems remained involving delivery of war materials and machinery, component parts, subcontracting service, and the like. These were "trouble spots" existing in contractors' plants.

Fortunately, most production problems did not require detailed and painstaking study for their solution. A telephone call to the manufacturer of a component part, the supplier of raw materials, or a governmental 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.21What was required in all instances, however, was a system that would keep track of progress 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 résumé on the status of all items for which he was responsible. This gave him a clear basis for forecasting, placing additional contracts, scheduling, and expediting the completion of contracts already placed. Many production difficulties were brought to the attention of the buyer, and thence to the Production Service Branch, through this report. For example, during fiscal year 1945, approximately 50 manufacturing establishments were visited to determine the status of production and to render aid when completion of contracts was delayed.22

MANPOWER PROBLEMS

Loss of Skilled Workers

Procurement officers exerted themselves, also, to assist manufacturers with manpower problems, which became increasingly serious as the war progressed. The operation of the Selective Service law had a constantly disruptive effect upon Medical Department contractors, for skilled and semiskilled workers, whose replacement was difficult, were regularly inducted into the Armed Forces (fig. 11). Whenever the induction of a valuable worker was threatened, the contractor informed the procurement office, which immediately sought an occupational deferment for the worker. Contact was made with the local Selective Service Board by telephone, by mail, and, in some instances, by personal visits. The worker's importance to the Medical Department contractor was urged upon the board, and representations were made as to the essentiality of medical supplies. If the request for deferment was rejected by the local board, the case was followed to the appeal board and, if necessary, to the State Selective Service Director. When all these efforts failed, the chief of the labor branch in the appropriate service command was urged to transfer the worker to the Enlisted Reserve Corps so that he could return to his factory and help complete the contract, or at least train a replacement.

Early in the war, selective service officials were reluctant to grant occupational deferments, especially at the lower levels, to the workers of Medical Department contractors, for they understood little of the Department's work and had even less information on the importance of medical supplies. Pressed by the necessity of filling their quotas and sensitive to ill-informed public criticism, the local boards inducted many skilled workers, whose loss delayed the completion of contracts for vitally needed supplies. This difficulty became especially troublesome in 1943, when local boards were "scraping the bottom

21Ingraham, N. K., and Hornbacher, Arthur: Production Control, General Difficulty. [Official
record.]
22
Annual Report, Contractors Service Branch to Public Relations Officer, Army Medical Purchasing Office, fiscal year 1945.


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FIGURE 11.-Woman operating forklift truck stacking boxes on pallets, St. Louis Medical Depot.

of the barrel" to fill the very heavy quotas demanded in that year. By the latter part of 1943, however, the general public and the local boards were becoming more acquainted with the importance of medical supplies-a development caused largely by radio, newspaper, and magazine advertisements. The attitude of local boards began to change and deferments were granted in greater numbers. From November 1944 to May 1945, approximately 2,500 deferments had been processed, and more than 1,100 deferments were granted.23

Labor Disputes

Labor officers also had to deal with strikes and the threat of strikes, and with their normally attendant cause-wage disputes. Strikes were not actually prohibited by law, but the right to strike was first hedged with the threat of public odium, then abridged by what amounted to compulsory arbitration. The National Defense Mediation Board was created by Executive 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 public opinion and no tool but moral suasion, it made an enviable record in its 10 months of existence. It was succeeded in January 1942 by the National War Labor Board, with authority to "finally determine" labor disputes. The big stick behind the soft words was the war powers of the President, who could and did seize plants in which either labor or management was unwilling to abide by the ruling of the National War Labor Board. The War Labor Disputes Act (Smith-Connally Act) of 25 June 1943 reaffirmed the President's power to take over essential plants in which work had been, or was about to be, interrupted.

No manufacturer holding Medical Department contracts was involved in such action, but the production of surgical and dental instruments had been delayed by strikes before the original mediation board was set up. To minimize such delays in the future, supply contracts by the fall of 1941 included the following paragraph:

"Whenever an actual or potential labor dispute is delaying or threatens to delay the timely performance of this contract, the Contractor will immediately give notice thereof to the Purchasing and Contracting Office. Such notice shall include relevant information with respect to such dispute."24

INSPECTION OF MEDICAL SUPPLIES

Before 1943, medical supplies were inspected after purchase in a manner which had been followed for many years. When supplies were received at depots, samples were withdrawn and tested for compliance with specifications. Samples of sterile solutions and products were forwarded to the Food and Drug Administration; other supplies which the depot was unable to test were forwarded to the laboratories of the procurement officers, at either St. Louis, Mo., or New York. Until a favorable report had been received on samples sent away for testing, the stocks from which they were drawn were segregated and made unavailable for issue. This system of inspection was satisfactory during peacetime. The quantities of supplies purchased were small, and they were procured from standard manufacturers who maintained adequate testing laboratories and were well acquainted with Medical Department specifications. No difficulties proceeded from the delay in making supplies available for issue since the depots maintained adequate stocks to meet all current demands. If a shipment of supplies failed to pass the tests, it could easily be replaced in ample 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 serious embarrassments, for such rejections resulted in the loss of critical raw materials and the waste of valuable manufacturing space, labor, transportation, and packing supplies. It soon became obvious that the inspection of medical supplies upon delivery, if not accompanied by inspections during the manufacturing process, was a luxury that the Medical Department could ill afford during the war.

In January 1943, an inspection section was established in the New York Medical Department Procurement District. Inspectors who possessed technical training and experience in testing various types of medical supplies were recruited and given still further training. The country was then divided into a number of areas, and the inspectors were assigned to the plants of Medical Department contractors: 33 inspectors entered plants in the Greater New York City area; 18 were assigned to the Middle Atlantic area (including upstate New York, Pennsylvania, Maryland, Ohio, and New Jersey); 9 were assigned to the New England area; and 11 were assigned to the Western area. These plant inspectors served a threefold purpose: (1) to check the contractor's inspection 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 departures from specifications, which were quickly corrected by grateful contractors. At times, also, the ambiguous wording of some specifications and purchase descriptions led to different interpretations by contractors and inspectors. These were soon settled by reference to chief inspectors and procurement officials. Perhaps the greatest difficulties arose when plant inspectors approved the shipment of urgently needed items which did not conform to all technical requirements of specifications, but which, nevertheless, were usable and suitable for their intended purpose. Those departures from specifications confused depot inspectors, who, although they had been informed of the new policy, returned a number of shipments on the grounds that they were too much at variance with specifications. This friction and disagreement were especially important in regard to substandard surgical instruments. At length, a conference in New York, attended by both plant and depot inspectors, established a procedure which satisfied all. After June 1943, when depot inspectors refused to accept a shipment approved by plant inspectors, the commanding officer of the Army Medical Purchasing Office received reports from both inspectors and rendered a binding decision.

The system of plant inspections appears to have been an unqualified success. In 1943, approximately 800 plants located in 29 states were served by the inspectors; by the following year, the number of plants increased to more than a thousand. The cost of the inspection was very modest-.103 percent of the cost of supplies shipped in 1943, and .157 percent in 1944.

It has been indicated that the plant inspections supplemented rather than replaced the final inspections at the receiving depots. It should be made clear,

25Pigott, John W., and Hornbacher, Arthur: Inspection. [Official record.]


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also, that employment of the testing laboratories of the Food and Drug Administration and the Army Medical Purchasing Office continued throughout the war. In fact, the laboratory of the procurement office, transferred from Binghamton, N. Y., to New York in February 1943, was enlarged and equipped to perform examinations for both inspection and the development of specifications. In fiscal year 1944, 5,429 formal examinations were performed by 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 to be a large volume of contract terminations, the Legal Section undertook the development of procedures and policies for processing them. Contract modifications were a trivial source of potential unpleasantness in comparison with terminations, and this wholly aside from the work devolving upon contractors and purchasing officers alike. In time and labor, termination of contracts frequently exceeded the initial contracting effort tenfold.

Terminations continued all during the war, and cancellations at the war's end were anticipated, but it is questionable that anyone foresaw their magnitude. Every contract for more than $1,000 written by the Medical Department during the war contained a clause providing that the Government could cancel the contract at its option and, in that event, would pay the contractor on a fair and equitable basis for costs incurred. Until September 1943, terminations were on a relatively small scale, totaling approximately $22.5 million, and were handled by the legal staff. Most cancellations stemmed from the substitution of newly developed items for obsolete items.

In September 1943, terminations had become so extensive that a Contract Termination Branch became a part of the Army Medical Purchasing Office. Because of cutbacks in requirements on all classes of medical supplies, two large waves of terminations occurred in September 1943 and February 1944 amounting to approximately $42.5 million.

It was recognized that the end of the war would automatically cancel the need for much of the material under contract; the date, of course, was unpredictable. In July 1944, Congress turned its attention to this matter and, to safeguard the economic welfare of the Nation, passed the Contract Settlement Act of 1944, establishing as primary objectives: (1) settling of terminations claims fairly and quickly; (2) prompt clearance of termination inventory from war plants; and (3) provision of adequate interim financing for war contractors pending settlements.

Training meetings were held in New York in June 1944 and in Chicago in August 1944, with large numbers of medical contractors in attendance. In the Army Medical Purchasing Office, too, preparations moved apace to meet this anticipated workload, including augmentation of the staff by additional

26(1) Annual Report, Procurement Division, New York Medical Depot, fiscal year 1943. (2) Annual Report, Material Standards Division, Army Medical Purchasing Office, fiscal year 1945.


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accountants as well as plans for transferring personnel from the buying branches to the Termination Branch on V-E Day.

Other preparations were occurring simultaneously to minimize the termination problem. In late 1944, as stocks accumulated and the War Department became optimistic about an early conclusion of the war in Europe, procurement shifted from long-term to short-term contracts. Close attention was paid to estimated future requirements. As a result of this policy, it was necessary to terminate only $11 million in contracts after V-E Day. When hostilities ceased in the Pacific, the entire procurement program was cut back according to plan and more than $54 million of Medical Department contracts were canceled within 24 hours. For the entire war period, approximately 4,000 different contracts involving $110 million in canceled contracts were processed and settled. Of this amount, $50 million was settled without cost to the Government.27

One of the more difficult problems of contract termination was disposition of items already completed but not yet delivered. It was at first determined that an attempt should be made to have the contractor keep these items at a fair valuation. Otherwise, an attempt would be made to dispose of them to foreign governments or to such organizations as the Russian War Relief and United Czechoslovakia Relief. Failing in these steps, the supplies were then to be shipped to depot stocks. Subsequently, The Surgeon General directed that all sales to the United Nations, including Russian War Relief, should be handled directly through the International Aid Division. A bulletin of completed items in the hands of contractors was prepared and distributed to business firms, relief societies, and other agencies. Considerable quantities of surgical instruments were sold to the U.S. Navy Department, and articles like kit pouches were sold to the Boy Scouts of America. Whenever practicable, the contractor would make the sale, using the proceeds to reduce his termination claim. The whole problem was bound up with the larger problem of depot surplus. Contractors and potential purchasers hesitated to retain or buy terminated supplies when the threat of disposition of huge depot surpluses loomed.

Disposal of unfinished supplies also involved many difficult problems. Frequently, unfinished items such as surgical instruments had no value other than their scrap value. When critical material was obtained under the priorities system for filling military orders, contractors could not use it for making items for civilian consumption. To clear up this dilemma, a ruling was obtained permitting contractors to use priority material for manufacture of end items of the same type, even though these new items would ultimately be sold for civilian consumption. If V-Loans were involved or if proceeds of the contract were assigned to some bank, other complications naturally ensued.

Packing and packaging materials were in constantly short supply. When contracts were canceled, the packing materials thus made available were 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 financial adjusting.

From the foregoing, it can be readily seen that terminations were time-consuming operations fraught with the possibility of bad public relations. The Medical Department settled all terminations incidental to the war without a single contractor's resorting to the contract appeal or dispute machinery of the War Department, nor was any case invalidated or suspended. Furthermore, 99 percent of these cases were settled within established time limits.

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