Department of Disposal

When you have to squeeze every last drop out of tightening budgets, streamlining processes is a good way to go, and outsourcing the change is even better.

Let's say that a major enterprise has a large asset that has reached the end of its lifecycle and is ready for disposal, either to the scrap pile or, if the asset is usable, to a buyer willing to take it off the organization's hands.


Now let's say that the enterprise in question is the Department of Defense and that the asset is, for example, a 1941 General Electric locomotive. Or a tugboat. Or a genuine U.S. Cavalry horse.


Such are the assets that come up for disposal through the Defense Reutilization and Marketing Service (DRMS), the DoD office responsible for the disposition of excess property generated by the U.S. military. Now, after years of using phone and fax to dispose of surplus goods, the DRMS has turned to an outsourced service provider to apply new technologies to the disposition of excess property, streamlining the government's processes, reducing costs and raising revenues.


Disposing of Assets at Defense


Most enterprises of any size eventually confront the question of how to dispose of end-of-life assets. The World Bank, for instance, has estimated that the market for business surplus in the United States alone is worth at least $350 billion annually. The U.S. government, as one of the largest enterprises in the world, is no different from any other large organization, and in fact the Feds sold about $3.6 billion in excess inventory in 2000, according to one study.


The Defense Department established the DRMS  known until 1985 as the Defense Property Disposal Service, or DPDS  in 1972 to consolidate the separate military services' disposal operations for the sake of improved efficiency and cost savings. Headquartered in Battle Creek, Mich., the service has about 1,800 employees at 100 sites spread across 39 states, including Hawaii and Alaska, as well as Puerto Rico, Guam and 14 other countries. DRMS is a field activity of the Defense Logistics Agency (DLA), which in turn is the DoD's logistics and support organization.


The DRMS sends much of the reusable military property it receives back into the country's defense infrastructure, finding new homes for about $1.5 billion worth of goods (based on the goods' original purchase price) in other services or programs in the DoD in fiscal year 2001 alone. The service sent another $314 million in goods and property to other federal agencies, and $265 million to state and local governments and other qualifying organizations in 2001. About $21 million wound up as scrap that year, and the service sold about $4 million in goods to foreign militaries.


But that still left about $48 million in goods that the DRMS had to sell off to the public last year, including everything from televisions and projectors to heavy equipment such as cranes or metalworking and woodworking machinery. In the past the service employed traditional disposal methods to sell off its goods, essentially using phone and fax to inform potential buyers of property coming up for sale and then holding a physical auction at one of the 100 Defense Reutilization and Marketing Offices, or DRMOs. Potential buyers would travel to the DRMO to inspect the goods or participate in the sale events.


Reinventing the Process


However, declining DoD budgets in the 1990s led the service to seek ways, in the lingo of the times, to reinvent its processes in order to handle surplus property more efficiently. The service took a step forward in 1994 when it began using its Web site to list information on property up for disposal, a move that eventually earned the DRMS a place among 15 finalists in the Ford Foundation's Innovations in American Government competition for more than doubling access to its system for redistributing excess Defense Department property.


By 1998, with budgetary constraints continuing to push the service toward further streamlining of its operations, the DRMS was ready to try outsourcing the disposition process for certain categories of goods. While the service declined to be interviewed for this article, in written responses to questions, a DRMS representative said the service's prior experience teaming with private industry convinced it that outsourcing "would be the most effective method" of disposing of the goods. Outsourcing would also allow the service to reduce its headcount by some 300 between 1998 and the end of the 2002 fiscal year.


The service awarded an initial five-year "commercial venture" contract, dubbed "CV1," to Scottsdale, Ariz.-based Levy/Latham Global in July 1998 for the disposal of such goods as machine tools, hardware and material handling equipment, in all about 35 percent of the usable goods requiring sale through the DRMS, in a total of 312 commodity categories. Under the contract, Levy/Latham, at the time a division of SurplusBid.com, would purchase, at a predetermined price based on the commodity, the surplus products that the DRMS wanted to put up for disposal through its various offices around the country. The contractor would then resell the goods using live Internet auctions and sealed-bid events, taking 20 percent of the net profits, sending the remaining 80 percent back to the government.


The DRMS intended CV1 to cover the sale of some $8 billion in goods from 1998 through 2003. However, after the program got rolling and the service found it was saving between $5 million and $8 million per year through the outsourcing program, the DRMS elected to bid out the bulk of its remaining disposition activities. In 2001 the service awarded a Commercial Venture II, or CV2, contract to Washington, D.C.-based Liquidation.com, which set up a dedicated subsidiary, Government Liquidation, to handle the sales under the contract. Liquidation.com, a division of Liquidity Services Inc., which competes with the likes of DoveBid, also purchased SurplusBid.com, along with Levy/Latham, and the DRMS subsequently rolled CV1 into the second contract and extended the program to cover the sale of $23 billion in surplus goods through 2008.


Bidding for Big-screen TVs


The terms of the CV2 contract mirrored those of the initial contract, with Government Liquidation working through DRMOs in the Continental United States, Hawaii, Alaska, Puerto Rico and Guam to lot goods for sale, decide how best to market the items up for sale, market the property to its database of some 100,000 registered buyers, and conduct the online auctions and sealed-bid events. Potential buyers can register for free on the auctioneer's site, GovLiquidation.com, read descriptions of goods coming up for sale and view pictures of the goods. The site typically lists property two weeks prior to a sale event, and auctions usually last for three days. Sealed bid events, in which buyers can submit bids by e-mail or fax, are usually accepted during a week-long window. (In auctions, buyers see the current bid for goods and can submit counter bids, while in sealed-bid events, buyers are unaware of competing bids.)


According to Hunter Hoffmann, a spokesperson for Government Liquidation, buyers for the goods range from nonprofits and churches purchasing video equipment to aerospace companies picking up materials they hope to use internally or to refurbish for resale. Most of the items sold through the GovLiquidation.com site come in larger lots, but goods put up for sale have included everything from big-screen televisions and video games to bowling pins and pool tables, all the way up to cranes and military vehicles that wind up in commercial use or on farms.


By expanding the categories of goods being sold through the outsourcer, DRMS has reported increased cost savings, up to $20 million per year, and the service believes that the targeted, industry-specific marketing that Government Liquidation is providing has increased the sale prices of goods put through the outside firm. "[Government Liquidation] is achieving better results than DRMS historically and is on par with private industry," wrote the service in response to a reporter's e-mailed question. Currently Hoffmann estimates that Government Liquidation is running 20 to 30 auctions and sealed-bid events per month, with about 10,000 line items per week going up for sale.


The DRMS is not the sole government agency to delve into online auctions. The General Services Administration (GSA) launched its own site, GSA Auctions, in 2001 to dispose of surplus vehicles, goods seized by the government in criminal cases and other surplus property. GSA reported in January that it had collected some $17.6 million in online sales in 2001.


Asked what lessons private businesses might draw from the DRMS' experience using a third party to handle the disposition of surplus, Hoffmann pointed to the advantages for the government of outsourcing an activity, the disposal of excess inventory, that falls outside the Pentagon's traditional core competency, which is, after all, national defense. "It's a good example of an entity outsourcing a non-core process," Hoffmann said.


For more information on how federal government agencies are using technology to streamline their acquisition processes and rev up their supply chains, see "e-Pluribus Unum" (<http://www.isourceonline.com/article.asp?article_id=2683>) in the June 2002 issue of iSource Business.