Military’s Surplus-Parts Policy: Sell Low, Buy High

MERRIMACK, N.H. —  Harold Foote plucked a small, dusty box off one of the piles that rise like cardboard stalagmites from the floor of his cavernous warehouse.

He snapped the fossilized Scotch-tape seal. Inside, swaddled in khaki-colored tissue paper that crumbled to the touch, was a metal valve used in aircraft engines.

A faded label indicated the U.S. Army purchased it in 1962 from Avco Lycoming, a defense contractor that has since been merged out of existence. The valve was never used, and the Army eventually sold it to Foote for a few dollars at one of its regular surplus auctions.

Foote figures he could get as much as $3,000 for it someday. Who might want to buy it?

The U.S. Army.

The valve is among thousands of gauges, rivets, bearings and other overstocked spare parts the military sells to surplus dealers at bargain-basement prices, as low as 2% of the original cost. But often the military discovers later that it needs some of the parts it sold, so it buys them back--at a huge markup--from the same dealers.

The Defense Department doesn’t separately track such sales, so determining how much it spends repurchasing its own equipment is difficult. A review of military audits and auction records and interviews with surplus dealers suggest the amount spent is at least $6 million a year and perhaps much more.

Downsizing Worsened Problem

This little-known spare parts merry-go-round has been going on for years, and picked up steam with post-Cold War military downsizing. Along the way, it has spawned a cottage industry of surplus dealers, some of whom have become wealthy selling lug nuts and laser components back to Uncle Sam.

Foote recently arranged to sell the Defense Department 900 generator shafts for about $200 apiece. Most of them were surplus parts he bought at department auctions for less than $20 each. Once, the Turkish government offered Foote $1 million for 250 surplus aircraft-engine turbine disks that the U.S. military had auctioned for $25,000.

“We make a living off of the government’s inefficiency and waste,” said Foote, who figures he makes $100,000 a year just reselling spare tank parts to the Army. “The Defense Department is incompetent. The purchasing people don’t stop buying, and the salespeople don’t stop selling.”

The buying and selling is done through the Defense Logistics Agency, which serves as the worldwide supply depot for all branches of the U.S. military. At any given time, the agency has more than 6 million different items, from cotton swabs to periscopes, stockpiled at bases around the globe, and it spends $3.5 billion each year on spare parts for aircraft, ground vehicles and other equipment.

To get rid of inventory it no longer wants or cannot warehouse, the agency holds regular surplus auctions. Batch lots of everything from bomber jackets and golf clubs to pistol triggers and tank treads get shipped every week to surplus dealers, many of whom have sprung up around large military bases.

The agency says that it expects an average rate of return of 2% to 5% of the original cost of the material, and that prices are determined by the “free market system.”

The system usually works in favor of the surplus dealer.

Five years ago, Bill Teague, a retired engineer in Eclectic, Ala., paid about $10 to buy a large box full of 100,000 small metal washers from a surplus dealer who had bought them at an Army auction. Teague thought it was a good deal.

But he didn’t know just how good until he got home and opened the box: Inside, he said, was an old invoice showing the Army originally paid $100,000 for the washers. Teague was so disgusted that he mailed little bags of the washers to members of Congress, along with tags showing what the military paid for them.

“I felt it was my patriotic duty to try to do something about these clowns,” he said.

Teague may have made out well on his purchase. But the government--which says it turns to surplus dealers when it needs an item quickly and cannot find it anyplace else--tends to pay much higher prices to buy back its own surplus.

For example, in August 1998 the agency paid a total of $1,000 to buy a duct assembly and a power transformer--both used in aircraft electrical systems--from two surplus dealers, who had each paid a few dollars for the items at the agency’s surplus auctions years before, records show. In March 1999, the agency paid $10 apiece for five rivets it had earlier sold for a few cents each.

The agency says it follows statistical models and policies dictating when to buy and sell inventory, but because it is impossible to forecast exactly how many parts it will need, some repurchasing is unavoidable. Its spokeswoman, Gerda Parr, asked that questions on the agency’s repurchasing practices be submitted, and answered, in writing.

“DLA makes great efforts to practice reasonable control over the reacquisition of surplus materiel by issuing and following general guidance on disposals, and by minimizing reacquisition, and we believe we are doing a good job,” the agency said in its response.

Not surprisingly, surplus dealers argue that the agency should repurchase more from them, not less.

The military would waste resources and personnel by warehousing so many pieces of rarely used equipment, and the repurchases account for only a fraction of what the military spends each year on spare parts, said John Fausti, executive director of the National Assn. of Aircraft and Communications Suppliers, a coalition of 120 surplus dealers.

“People can look at the Department of Defense and say, ‘Gee, aren’t they stupid to be doing this,’ ” said Fausti. “But if the DOD were to try to keep all this stuff, they would need a warehouse the size of Rhode Island.”

Fausti estimated that, overall, surplus dealers are able to sell only about 5% of all surplus material they purchase from the government. The fact that 95% goes to waste suggests that the government is buying too many spare parts in the first place, he said.

In its written responses, the agency said it “buys stock to meet expected demand. But demand is highly variable, particularly on repair parts for aging military aircraft, and if it is lower than anticipated over an extended period of time, surpluses can build up.”

The agency also said it did not know how often it buys back previously sold spare parts, or what it spends on them. Auditors from the Defense Department’s Inspector General’s Office tried to figure that out earlier this year, after stumbling upon the agency’s repurchasing habits while pursuing a related matter, said Tilghman Schraden, who directs audits of agency programs.

“We found it ironic,” Schraden said. “It’s clear that in some instances they’re practically giving the material away . . . and then buying it back at almost the original price. It’s a good deal for the surplus dealers.”

Because the Defense Department doesn’t track such sales, said Schraden, “we really don’t know what universe we’re dealing with here.”

Using data provided by the association of surplus dealers, the auditors determined that 29%--a little more than $6 million--of the association’s annual sales to the military was surplus that the military had previously sold. The rest was non-surplus equipment and parts that the dealers also sell.

Taking Risk, Reaping Reward

But the association does not represent all surplus dealers, and several dealers interviewed said that their own surplus sales to the government accounted for more than the auditors estimated.

Brian Cole, vice president of United Aeronautical in Tucson, said that up to 40% of his surplus business goes to the Defense Logistics Agency. United has three warehouses on 60 acres in the desert packed with surplus parts and holds on to them for 10 or 20 years before selling the material for scrap, he said.

“There’s a risk involved in buying surplus because you never know how much of it will get scrapped for pennies a pound because it’s never resold,” Cole said. “The combination of being smart and lucky has made some people in this business very wealthy, but there are plenty of surplus dealers scratching out a living.”

By his own account, Harold Foote is among the smart and lucky.

Foote, a big, craggy New Englander, owns Transupport Inc., an electronics and aviation equipment reseller. The company’s sprawling, fenced-in compound next to a rail line is fed by a steady stream of trailer trucks, most bearing military surplus parts.

Foote, who started his business in the 1970s after working as a helicopter parts salesman for a defense contractor during the Vietnam War, said military surplus accounts for 30% to 40% of his $1 million a year in sales to the military.

The money to be made reselling surplus parts can be good, he said.

“We buy this stuff and gamble on it,” Foote said. “It’s risky, because the vast majority of it will just sit here and never be resold. But the stuff you are able to sell more than makes up for it. We’ve done very well.”