Military Logistics Reversals

Military Logistics Reversals

Copyright 2003, Traffic World, Inc.

Anyone who has ever wanted that U.S. Army cargo truck or cargo extraction parachute can now bid for it online. In a new twist on one of the military''s oldest operations - the disposal of surplus equipment - American and British armed forces are using online sales channels to sell off billions of dollars worth of excess equipment, everything from wrist watches and combat boots to cargo planes and toilet seats.

The sale of army surplus goods has been famously ad hoc for years, with potentially valuable equipment often being allowed to deteriorate and other times being used to launch large-scale commercial businesses as material slipped through the military''s supply cracks. Now, the online sales channel has created a significant opportunity for firms in the reverse logistics business.

In November, the U.K. Ministry of Defence launched a global online auction site for the sale of surplus aircraft, ship and armored vehicle parts and equipment.

The annual sales value of these items is estimated at $6.5 billion but the company that was awarded a five-year contract to manage the reverse logistics operation, Liquidity Services, believes it can get at least 50 percent more.

Based in Washington, D.C., LSI was the only U.S. firm to compete for the contract. All the other 59 bidders were U.K.-based. LSI established a U.K. subsidiary, Liquidity Services Ltd., to operate the business.

Why would a country''s defense ministry be open to outsourcing the sale of its excess military equipment to a foreign-based company? Britain''s MoD "is very forward thinking" said Bill Angrick, chief executive officer of LSI. "They are even ahead of the U.S. in some respects in generating best practices."

Perhaps, but as with government agencies worldwide, the MoD also is under pressure to be more cost-efficient.

Commercial online auctions not only promise to increase returns for government customers, they "compress the sales cycle" and turn surplus assets into cash quicker, according to Angrick. For buyers, the online channel offers a convenient medium for browsing through inventory without trekking to remote military bases.

To deliver higher returns, auctioneers need the economies of scale that come with a large, global database of potential buyers. A multibillion-dollar contract with the U.S. Department of Defense has helped LSI develop such a database. The seven-year contract was signed in 2002 and covers multiple item categories. The DOD estimated that approximately $23 billion worth of equipment would be sold over the life of the contract.

The U.S. government agency that deals with Government Liquidation LLC - the subsidiary of LSI set up to manage the contract in the United States - is the Defense Reutilization and Marketing Service. "During the first two years of the contract, GL has exceeded the historical DRMS gross rate of return by about 37 percent," said the agency. "Operating costs have remained flat while monthly distribution payments to DRMS have increased by nearly 200 percent."

The revenue growth has come even as the amount of surplus property issued to Government Liquidation has declined during the contract. The company emphasized that the fall-off is due to less equipment being available from the military, not performance issues.

According to the DRMS, the online business model sells smaller lots to a larger number of end users compared with traditional sales channels. It also provides more detailed information to buyers.

Partnering with a commercial organization enables the agency to share the operating risk and be exposed to private- sector business practices.

DRMS said it is working on a similar contract for the sale of scrap in the continental United States and Alaska. It expects to release a Request for Technical Proposals/Draft Invitation for Bids "as soon as possible."

The contract with Britain''s defense ministry represents only about 10 percent of the ministry''s business, said Angrick, "but we can leverage the economies of scale."

LSI has a registry of some 120,000 qualified buyers in more than 80 countries. "We add about 6,000 buyers a month," he said and retain roughly 75 percent of them.

LSI is responsible for the pickup of surplus equipment from 54 MoD depots in the United Kingdom, Germany, Cyprus, Falkland Islands, Canada, Turkey, Balkans and Gibraltar. The volume is estimated at over 440 truckloads per year.

The company sorts and stores the equipment - it manages about 2 million square feet of warehouse space - generates all sales material, and sells the items using a combination of online auctions, online sealed bids and negotiated sales.

It also delivers the goods to buyers when required and uses third-party logistics contractors such as DFDS in Europe and JJW Logistics and FreightPro in the United States.

LSI''s contracts with the military now account for about two-thirds of its business, Angrick estimated. "The Department of Defense and U.K. surplus contracts are probably two of the largest service opportunities of their kind in the world," he said.

LSI is pursuing similar contracts in other parts of the world.