required, and there are certain machines that are set up for their use for a short period of time and then they seem to sit there. There seems to be an exceptional amount of machinery for a toolshop, in a large prime manufacturer there seems to be an awful lot of equipment and personnel doing nothing after a period of time and so, consequently, it does sit there and is sometimes idle. You might say it was not arranged properly. It was only a small amount of tooling to be done. Yet there was a terrific amount of equipment bought for it. Now we maintain, instead of buying this equipment to do a certain amount of tooling, it would be cheaper for the Government and the prime contractor to look into small business before the equipment is purchased for this particular category.

Mr. HORTON. Will the gentleman yield?

Mr. ADDABBO. Yes, surely.

Mr. HORTON. This brings up this whole area that I was speaking about in my opening statement: this matter of procurement. As I indicated, I am on the Military Operations Subcommittee of Government Operations, and we have been making an in-depth study of this problem in procurement. This is one of the serious areas in this whole field of procurement that I think has to be looked at very carefully. The testimony that you give here I think is very important and bears on the hearings that we have got before the Military Operations Subcommittee.

I noticed on page 14 you made the statement:

We think that the procurement policies of the Government are not doing the job they are supposed to do for the country as a whole and for small business as a particular part of the industrial economy.

Mr. CLEVELAND. Yes.

Mr. HORTON. Now, part of the problem that you get when the Government gets into these major contracts, especially when you are dealing in the whole-package concept, that one contractor wants to have everything inhouse, and this is part of the problem you are talking about. The little guy is being squeezed out, because the big contractor wants to handle the whole thing himself to have control over it—and this creates a problem for the tool-and-die industry, I would think.

I think that the statement you made on page 14, and the other matter that Congressman Addabbo was asking about, are related to this whole problem of procurement. It seems to me that what we have got to do is keep the pressure on the Department of Defense and other agencies. I was just up a few moments ago listening to testimony from Mr. Siegel, who is the Acting Director of the Office of Logistics and Procurement Management, Department of Transportation. He is testifying on the SST procurement, which again is this whole package concept. I think the agencies of the Federal Government the tendency to squeeze out the tool-and-die industry and the small businessman who might be doing subcontracting with the large con

tractor.

As I said earlier, the statistics show that the amount of involvement of small business is on the downgrade, and this ought to be looked at very carefully. So I think your testimony is very valuable here, and I do want to underscore that also, because I think it is a very important thing that ought to be looked at in this whole procurement picture. Mr. CLEVELAND. Thank you.

Mr. ADDABBO. I have no further questions.

Mr. SMITH. I just wondered, Mr. Cleveland. Some of the witnesses were reluctant to come to these hearings, and you described the situation where a large company gets a list or decides who they are going to invite to bid. In fact, we finally-to round out the testimony-subpenaed Mr. Haupt, Mr. Zeidler, and Mr. Greenburg. Is there any danger that some of the companies would retaliate against these witnesses who have come here to tell this important story, or attempt to?

Mr. CLEVELAND. Unfortunately this could be true, and it could not be true. To be frank with you, we have many people who could be added to this particular committee, but they really had the fear that you speak of: that they may lose a contractor or they are worried about the retaliatory problems. However, there are many of us who feel that something has to be done, and we are willing to accept these particular problems, whatever they are.

However, I do not feel-and I mean this sincerely-I do not feel that top management in any way would interfere with this. I do not think so really. I think they are broadminded enough to know that we are all looking out for the well-being of the country, not particularly any one individual, and I am sure that these people would not take any retaliatory measures, you might say. But what happens is the lower echelon down the line can do this, people who have quite a bit of power in issuing a contract one way or the other. They could say, "Well, these guys are being unjust to my company or to my boss in one way or another," and this could mean quite a bit.

However, I feel that this committee would exert any influence. that it can, that if something like this did happen, I am sure that this committee would use its influence to see to it that it did not happen.

Mr. SMITII. As a matter of fact, you are quite right about that. As a matter of fact, when I was told that we were experiencing reluctance for persons with current contracts with the automotive industry to come, it raised my suspicions and it makes me even more determined to look into this question as to the Clayton Act, because if there is even some kind of a subtle approach being made to these people, then there must be something you know.

Mr. CLEVELAND. You know, this is correct.

Mr. SMITH. Any more questions?

Mr. ADDABBO. Do you feel, Mr. Cleveland, that possibly big business might be interested in us finding a solution to this, that they might divest themselves of this particular problem if it could be resolved? Mr. CLEVELAND. Do I understand you right: that big business might divest themselves of this problem?

Mr. ADDABBO. Would like to be divested of this particular problem. Mr. CLEVELAND. I think that if it was brought to the attention of the proper people in the proper places as to exactly what is happening, this might be accomplished. We would hope that it would be. I would say that this would be one of our primary purposes, as long as we get the problem squared away, how we do it with the least amount of trouble would be the object of us being here, and I think that it might be possible that in some large businesses, the people who have the right to say "do this," or "do that" are not aware of what is going on. This

is quite possible. But, in some cases, I think they are aware, but feel that it might be the best thing to do, but I do not think they realize what it is doing to the country in regard to the small businessman.

Mr. ADDABBO. One thought came to me. I have read something about new machines, computerized machines. Is that in anyway affecting your small business operations in the tool and die industry?

Mr. CLEVELAND. As far as machines are concerned, I would like to make this very pointedly. We in the small business community, so to speak, can purchase anything that we need in order to compete, in order to make qual ty tools at a lower price, or at an equal price, but the business must be there in order for us to purchase it, and if this stuff goes in-house, then the business is not there, and then the man is taking too much of a chance to spend a lot of money for equipment that he may not get the work for. He can take the chance on getting the work and do the gambling whether he can do it and use his ingenuity to get it out and pay for the machines but unless the work is there, there is no way to pay for it.

Mr. ADDABBO. Thank you.

Mr. SMITH. Thank you, Mr. Cleveland. You have made a very good statement and a very good witness.

Mr. CLEVELAND. Thank you, sir.

Mr. SMITH. We now have a group of witnesses-Mr. Bratton, Mr. Bredenbeck, Mr. Zeidler, and Mr. Greenbury.

I regret we have to have groups, but in order to do this in the time that we have, we just about have to present it in this way. Do you have a format figured out?

TESTIMONY OF ROBERT E. BRATTON, LIGHTHOUSE POINT, FLA.; RICHARD BREDENBECK, PRESIDENT, EFFICIENT INDUSTRIES CORP., CLEVELAND, OHIO; OSWALD W. ZEIDLER, PRESIDENT, ZEIDLER TOOL & DIE CO., DETROIT, MICH.; AND DONALD B. GREENBURY, PRESIDENT, ARROWSMITH TOOL & DIE, INC., DETROIT, MICH.

Mr. BRATTON. I think we agreed amongst ourselves, Mr. Chairman, that I would speak first for this particular small group.

Mr. SMITH. Go ahead.

Mr. BRATTON. If I may I would like to read a statement for the record.

Mr. SMITH. Fine.

Mr. BRATTON. My name is Robert E. Bratton, and I reside at 2533 26th Avenue NE., Lighthouse Point, Fla. I am a graduate of the University of Michigan, where I received A.B. and juris doctor degrees. I studied accounting as well as law at the university.

From 1942 to 1946 I was on the comptroller's staff of Fisher Body Division, General Motors Corp., in the central office, and during part of that time I served as a supervising contractor administrator for Fisher, participating in the pricing, negotiation with the Air Corps, and the administration of Government contracts for military aircraft. Such contracts at times included very substantial amounts of special tooling, not only for Fisher's use in its production of contract

items, but also tooling made in Fisher's toolrooms for other Government contractors.

In 1964 I left Fisher to accept employment with Den-Ark Tool & Die Co., in Detroit, Mich. This company later changed its name to Bratton Tool & Die Co., and from about 1952 until May 1968, I was general manager, with full responsibility for estimating, sales, production, accounting, et cetera. I resigned this position in May 1968, and am not at this time associated with any company in the tooling or automotive fields.

Mr. HORTON. Just for the record, if I could interrupt, what is your position now? Are you employed or retired?

Mr. BRATTON. Well, sir, it is sort of a mixture at the moment, because I have just changed businesses, and we do have small business interests in a shop in Florida.

Mr. HORTON. Thank you.

Mr. BRATTON. It is not in the tooling field, however. It is in the apparel field.

I appreciated the invitation to appear before this committee, and responded because of my concern for the survival of the independent tool and die shops as a separate industry in view of the current trend toward integration of more and more of the available work into the captive, or inplant, tool and die rooms of the large companies..

The record of service of the contract tool and die shops in aiding and supporting big industry, as well as our Government, in the rapid and skillful preparation of tooling for mass production in time of peace as well as war, certainly warrants the assumption that this small business industry is important to our country and that its survival is in the public interest.

Accordingly, it seems appropriate for this subcommittee to inquire into the reasons for this trend, which seems to lead inevitably toward the destruction of the tool and die industry, and the methods being used to accomplish it.

If big industry started buying up all of the independent tool and die job shops in a given area, wouldn't that shortly restrict competition in that field in a manner objectionable under our laws? And if the large plants merely withhold work traditionally placed with the job shops, place it in their own constantly expanding toolrooms, forcing the layoff of help in the job shops, help which is then promptly hired into the large captive shops, isn't the closing of the independent shops from this sequence of events worthy of equal concern and scrutiny? And if this process is expedited by the large companies by having the captive shop of one division bid and receive work from another division of the same company in compettion with the outside job shops which normally serve that customer, and if the price submitted by the captive shop is much less than its full cost for performing the work, is that fair competition?

Fisher Body Division for some time has been building up its inplant tool and die facilities, and in recent years has solicited and obtained work from other GM divisions in competition with job shops. And more lately, Chevrolet has joined in this. I seriously question whether either would succeed in true competitive bidding if they were required to use their full costs in computing their prices.

Certainly the Government has an interest in the "make or buy" decisions of big industry when tooling for Government contracts is involved. If the most economical method of providing such tooling is not followed, tax dollars are wasted. And we all have the right to complain about that. But even on commercial products like automobiles, where list prices of comparable models are only a few dollars apart, any practice of accepting excessive costs that can be passed on to the consumer would seem objectionable unless justified on some other

basis.

Now what about the relative economics of tooling build in the large captive shop, as opposed to the cost of producing it in a typical job shop? From my experience I can say that it is not likely that any of the captive tool and die shops operated by the major automobile companies has a true total overhead expense of much less than 400 percent of direct labor on the construction of new tooling, provided that such overhead is distributed to the activity and recognized in the same manner as it is applied to the company's other new products.

And in some captive facilities overhead will run much higher than 400 percent. A well operated job shop can maintain a total overhead cost of 100 percent of direct labor, because of the entirely different type of plant used and structuring of the organization.

Therefore, I have said that in bidding new work, or in deciding to expand and take on more work, captive shops generally do not recognize their full costs in setting their prices. Instead of including their actual overhead rate, they use an artificial rate, sometimes referred to as an assigned burden rate, of perhaps 50 percent or 75 percent. This is the way they compete with job shop pricing.

The use of less than full costs for captive shop prices frequently is rationalized as follows:

(a) The inplant tool or die room is needed for repair and "maintenance of existing production tooling, and is therefore is a "burden" activity.

(b) You cannot apply normal rules of application of overhead to a burden activity, so we can set up an artificial or assigned rate suitable for internal purposes, and apply this to our captive tool or die shop work.

(c) Now that we have avoided the use of our true overhead costs on work done inplant, our captive shop prices using only the assigned burden rate look competitive with independent job shop prices, and we should build new tooling inside.

The fallacy, of course, is that the use of the assigned rate in the first place is an acceptable accounting practice only for the repair and maintenance of tooling, and when new tooling is to be built full cost should be recognized, as it is in the manufacture of other new products. The pricing results obtained may be illustrated as follows:

First, let us look at the example of the captive shop and take its full cost, assuming a major set of tooling which takes 40,000 hours to produce at an average direct labor cost of $5 per hour, we would have $200,000 of direct labor. Applying an actual overhead rate of 400 percent would give us a true burden of $800,000 on this set of tooling. Assuming material cost of $300,000, we would have a total cost in the captive shop on that set of dies of $1,300,000.