Issues Associated with Second-Source Procurement Decisions
The basic argument for competition in Department of Defense (DoD) procurement is that it is believed to reduce the government's cost of purchasing goods and services. Nonetheless, in some cases it may be actually less costly for the government to forgo competition and rely on a single supplier. The DoD's program manager must determine whether competition is likely to result in savings or losses for the government; if competition is indicated, he must then decide on what specific form it should take. This report focuses on one of the DOD's strategies for establishing competitive production sources — "second-source" procurement, in which two firms produce a single design. Such an arrangement does not meet the requirements of traditional economic theory for the forces of competition to operate with full effectiveness. Only one buyer and only two sellers exist; demand is inelastic but uncertain. The authors describe five methods of estimating single-source cost, analyze the effect of competition, and discuss the breakeven method, which deduces the magnitude of pure savings needed to compensate for the cost to the government of introducing a second source. Finally, they analyze the Tomahawk project as an example of second-source procurement, and consider the quality of the resulting product.