NBSIR 76-983

A Survey of Manufacturers'

Views on the ETIP

Procurement Experiment

Volume Two: Water Heaters

p. Clare Goodman

Product Systems Analysis Division

Center for Consumer Product Technology

Institute for Applied Technology

National Bureau of Standards

Washington, D. C. 20234

January 1 976

Final Report

Prepared for Experimental Technology Incentives Program

National Bureau of Standards

Washington, D. C. 20234

NBSIR 76-983

A SURVEY OF MANUFACTURERS'

VIEW ON THE ETIP

PROCUREMENT EXPERIMENT

VOLUME TWO: WATER HEATERS

p. Clare Goodman

Product Systems Analysis Division

Center for Consumer Product Technology

Institute for Applied Technology

National Bureau of Standards

Washington, D. C. 20234

January 1 976

Final Report

Prepared for Experimental Technology Incentives Program

National Bureau of Standards

Washington, D. C. 20234

U.S. DEPARTMENT OF COMMERCE, Elliot L. Richardson, Secrstary

James A. Baker, III, Under Secretary

Dr. Betsy Ancker-Johnson. Assistant Secretary for Science and Technology

NATIONAL BUREAU OF STANDARDS, Ernest Ambler, Acting Director
(!
TABLE of CDNTENTS

Page

ACKN0WLEDGEME3SITS i

ABSTRACT ii

1.0 INTRODUCTION 1

1.1 Backg2x>und 1

1.2 Factors to be Evaluated 2

1.3 Water Heater Procurement Methodology 2

2.0 METHODOLOGY 4

2.1 Questionnaire Developnent » . . . 4

2.2 Sanple Selection 4

2.3 Data Collection 4

3.0 SURVEY RESULTS 5

3.1 Background: The Water Heater Industry 5

3.2 The Government Procurenent Mechanism 5

3.2.1 Industry Problems 5

3.2.2 Factors in the Decision to Bid on IFB . . 11

3.3 Life-cycle Costing 13

3.3.1 The LCC Formula 13

3.3.2 Maintenance Data 14

3.3.3 Warranty Information 15

3.4 Bidders Conferences 15

3.5 Adveirtising 16

3.6 Engineering Considerations 17

4.0 DISCUSSION 17

APPENDIX A 19

APPRMDIX B 24

APPENDIX C 25

APPENDIX D 26

APPEtOIX E 27

APPENDIX F 29

ACKNOWLEDGEMENTS

The author wishes to thank Dr. Charles Fried, Project

Leader, for providing administrative assistance and guidance

throughout the survey. Dr. Fried furnished valuable information to the project staff and edited the manuscripts.

Mr. Joseph Staugaitis, deserves special thanks for his

work in assisting in the design of the survey, and contributing

to the data analysis and interviews. Theodore Fody, Project

Monitor, is acknowledged for his helpful guidance and assistance

throughout the project.

The author would also like to thank Mrs. Mary Abbott for

her secretarial assistance in planning interview trips and in

the preparation of this manuscript.

A Survey of Manufacturers' Views on the ETIP Procurement Experinent

Volume Two: Water Heaters

ABSTRACT

This report describes the findings of a survey of seven water

heater manufacturers by the Center for Consuner Product Technology. The

survey was conducted for the Experimental Technology Incentives Program

(ETIP) as part of its evaluation of a Federal Supply Service (FSS)

procurement of water heaters. Survey questions were designed to obtain

manufacturers' views on the use of Government procurement policies as a means of increasing the rate of introduction of new technologies into

the consuner marketplace. The questions covered the following areas:

(1) reasons for participation or nonparticipation of a manufacturer in

the ETIP experiment; (2) problems that a manufacturer encounters with

existing Federal procurement practices; (3) acceptability of using lifecycle costing in the bidding procedure; and (4) effect of the most

recent Govemnnent procurement on present and future ccrrpany operations,

including support for engineering and investment in research, types of

themes used in advertising campaigns, etc. Results of the survey are

reported, and inplications are drawn for future ETIP involvement in

Government procurement activities.

Key words: Energy-efficient products; Experimental Technology

Incentives Program; life-cycle costing; procurement

ej^riitients ; water heaters.

A Survey of Manufacturers' Views on t±ie ETIP Procurement Experiment

Volume Two: Water Heaters

1. Introduction

1 . 1 Background

The Experimental Technology Incentives Program (ETIP) of the

National Bureau of Standards (NBS) is one part of the Federal Government's efforts to determine what steps can be taken to increase the rate

at which new technologies are introduced into the marketplace. The ETIP

is part of a continuing effort by the Federal Government to "work as a more effective partner with the private sector in the development and

application of science and technology to strengthen the nation's economy

and iirprove the quality of life." 1/

ETIP has selected Federal procurement practices as one of the areas

in which it is performing special studies. Five procurement experiments

currently underway have been designed to determine whether it is feasible

to stimulate development, production, and marketing of energy-efficient

products through the use of Government purchasing practices. Each

experiment is planned to last three years in order to allcw sufficient

time for industry to introduce technological innovations.

These five procurements, all of which were perfoimed in conjunction

with the Federal Si:53ply Service (FSS) , a part of the General Services

Administration (GSA) , are intended to deteimlne whether modifications in

procurements, such as by the use of a modified life-cycle cost formula

in a bidding procedure, could increase the availability and recognition

of energy-efficient appliances in the marketplace.

The life-cycle cost (LCC) of an item is the total cost of the items'

purchase, operation, maintenance and servicing, and disposal. An LCC

program has been inplemented by the Federal Supply Service. Procurements

for the five products have included some partial form of LCC in their

bid price. None of these LCC formulas considered all ownership costs,

but they have included some costs other than initial costs.

The September, 1974 Invitation for Bid (IFB) for gas and electric

water heaters 2/, sanetimes referred to as a Request for Proposal (RFP)

is one of five procurements performed jointly by ETIP and FSS.

T/ President's Science and Technology Message of March 16, 1972.

2/ "Two Step Formal Advertising for FSC-4520 ~ Water Heaters"

Solicitation No: FPGA-FH-55515-A9-16-74. This document can be

obtained by writing to: General Services Administration Federal

Supply Service, IFB/RFP FPGA-FH-55515-A-9-16-74 Washington, D. C.

20406

-1-
1.2 Factors to be Evaluated

In order to determine v^ether the Federal procurement process can be used

to stimulate the marketing of energy-efficient products, ETIP has undertaken a program to evaluate its five procureinent experiments. The Product Systems

Analysis Division (PS7\D) of NBS was asked by ETIP personnel to assist in its

evaluation of the water heater procuranent. PSAP's role in the evaluation

was limited to conducting a, survey of firms that inanufacture water heaters.

The survey was designed to include a sanple of firms in the industry rather

than just companies that bid on ETIP experintients . Information was sought on:

(A) Reasons for participation or non-participation of

a company in the most recent FSS procuronents,

(B) Problems that a manufactiirer encountered with existing

Federal procurement practices,

(C) Acceptability of using life-cycle costing in the

bidding procedure,

(D) Effect of the most recent Government procurement on

present and future ccstpany operations, including support

for engineering and investment in research, types of

themes used in advertising campaigns, etc.

"The survey examined the outcome of the ETIP experiment as determined

by the manufacturer responses and new product development in water heaters.

The author was not involved in the design of the experiment and the particular experimental design and life-cycle cost formula used. No attempt was

made to evaluate whether the particular experimental design and life-cycle

cost formula utilized are the most effective mechanisms for bringing about

increases in the energy efficiency of water heaters.

1.3 Water Heater Procurement Methodology

Water Heaters were selected by ETIP to be one of their procurement

experiments since:

• Water heaters are significant "end" users of energy;

• Improved energy efficiency is feasible in water heaters;

• Water heater energy costs are significant;

• Water heaters require little maintenance, and therefore

maintenance need not be included in the life-cycle cost

formula. , . , ,

• Life-cycle costing evaluation utilizing only acquisition and

operating costs is especially appropriate for water heaters. 3/

3/ "The Experimental Technology Incentives Program: Procurement Experiment

Plan 4" Prepared by Booz, Allen & Hamilton, Inc., November 1973.

-2-
Previous FSS procurements of water heaters had been awarded solely

to the lowest bids that met the specifications. The total cost of

ownership was not included in these previous bids. The bids of the

IFB being studied were evaluated in terms of a modified life-cycle

cost formula.

Reduction in the consunption of energy by water heaters is feasible

although estimates of the savings vary widely. With the large amount of

energy that water heaters consume, even small increases in their efficiency

will resiiLt in significant energy savings, provided the high efficiency

models are broadly accepted. 4/

The estimated number of residential-type gas and electric water

heaters to be purchased for the September 1974 experimental procurement

was 7,650. Bids in this procurement, were requested for each of 10

regions in the U.S. with the requirements shown in Table 1.

Table 1. Performance and Size Requirements

Type

Ncsninal size

(Capacity

gals. + 10%)

Pcwer Input (Watts)

Lcwer Unit Upper Unit

Recovery

Capacity (Min .

)

Electric 52 1000 1500

Electric 80 1500 2500

Gas 40 27.7 gals, per hr.

Gas 50 30.0 gals, per hr.

The above sizes were chosen for the ETIP procurement experiment since

they were the water heaters with the largest dollar volume. Other size

water heaters were purchased under separate procurements and not studied

in the experiment.

In this type of procurement, the FSS does not purchase the items

directly from the successful bidder, but only identifies the item and

the potential contractor in an FSS supply schedule.

The procurement procedure is divided into two steps; step 1 — submission and evaluation of technical proposals without prices, and step

2 — sutmission and evaluation of bid prices. For the first ETIP water

heater experiment two of the four technical proposals received were

judged to be technically unacceptable. Price bids were then solicited

from the remaining taso bidders.

47 Booz, Allen and Hamilton, Inc. , "Stimulating Increased Efficiency

in Residential Water Heaters Through Federal Government Procurement

Action," November 1973.

-3-
2. Methodology

2.1 Questionnaire Developsnent

A preliminary set of questions for the survey was derived from

discussions with ETIP personnel on the desired areas of investigation,

and from the experience gained from a previous ETIP evaluation of the

Window Air Conditioner procurement. 5/ Suggestions for the survey were

sought from the Appliance Labeling Section of PSAD as well as from

representatives of FSS. Advice was also obtained from representatives

of the Gas Appliance Manufacturers Association (GAMA) who reviewed and

concurred with all of the survey questions. A final draft based on the

results of these meetings was reviewed by ETIP and became the final

version of the questionnaire as shown in Appendix A.

2.2 Sample Selection

Conpanies considered for participation in the survey were selected

from a listing provided by GAMA of 95 percent of all known U.S. residential

water heater manufacturers and the list of water heater bidders provided

by FSS. Caipanies surveyed included the two finns that bid on the 1974

En?IP procurement and a representation of non-bidders. The sartple included

a geographic distribution of both large and small manufacturers. Seven

manufacturers met the above criteria and were available during the

survey period, August and September 1975 (Appendix B)

2.3 Data Collection

Prior to the first actual contact by a survey team member, each of

the caipanies scheduled to be visited was sent the letter shown in

i^pendix C. The ccxipany official to whom the letter was addressed was

designated by GAMA as the appropriate contact. Shortly after the letters

were sent, telephone calls were placed to each of the officials to whan

the letters had been addressed. The caller further described the purpose

of the proposed meeting and requested that cotpany representatives attend

the meeting who were familiar with government procurement. In addition,

officials from the marketing and engineering departments of the catpany

were asked to attend, if possible. The number of executives interviewed

at a session ranged from one to five individuals, depending on the

carplexity of the carpany's organization.

The interviews began with a brief account of the motivation for the

modified procurement experiment and the purpose of the survey. A standard

ejqDlanatory paragraph was read to all participants (Appendix D) . Participants

were also told that they vrould receive a copy of the final report after it was

published.

J7 Unpublished manuscript, Charles Fried, Fran Bents, and Ted Fody,

"Survey of Window Air Conditioner Manufacturers," June 1975.

-4-
The interviews were cxDnducted in an open-ended manner, generally

lasting from two to three hours. The interviewer read each question

to all particpants at the same time. All of the ccarpanies were

cxDoperative and helpful.

3. Survey Results

3.1 Background: The Water Heater Industry

According to GAMA, there are approximately 25 water heater manufacturers in the United States. Six nanufacturers produce over 90 percent of

the water heaters sold in the U.S.. These firms sell their products

primarily to vdiolesalers vdio in turn sell them to plumbers or to building

contractors. Both of these trades are extremely price conscious. As a result the industry is very price (initial cost) corpetitive.

Several manufacturers mentioned that product changes in the past

were usually directed towards reducing costs, or increasing the amount

of hot water v^iich a given size heater could provide per unit time.

These trends have had an effect on the character of the water heater

industry. Large plants, with substantial production economies, characterize the majority of today's water heater industry.

Water heaters are sold mostly through distributors. Generally

distributors do not bid on Government procurements. One reason for this

is that scsne manufacturers bid directly (without going through their

distributors) and therefore, the distributors are not in a good conpetitive

situation v^en their bid prices are conpared with those originating from

manufacturers

As shown in Table 2, Government purchases do not represent a large

market share for any of the surveyed manufacturers.

Table 2. What percentage of your overall operations

is Federal Government business?

Number of Responses

None (or practically none) 2

Approximately 1% 2

Approximately 2% 2

More than 2%, but less than 5% 1

-5-
The percentages given above include all Federal Government purchases

and are not limited to those made through the FSS contracts. FSS is not

the only procurement office for Government water heaters, since the

Department of Housing and Urban Development (HUD) has its own procurement mechanism. An attempt was made to determine the percentage of

Federal water heater purchases represented by this FSS procurement, but

this infonnation was not available.

Of the seven firms studied, three obtained information about

Government procurements by several methods, two obtained information

from only one source v^ile the remaining two obtained very little

information of any kind. These results are shown in Table 3.

Table 3. How do you find out about specific

Government procurements?

Number of Responses*

FSS bidders list 3

Other r/Iailing lists (HUD etc.) 4

CoTTTierce Business Daily 1

Personal Contacts and 3

Information Sources

Don't find out 2

*The total number of replies exceeds seven v^en one

or more ocarpanies provide more than one response.

3.2 The Government Procurement Mechanism

3.2.1 Industry Problems

All seven ccrrpanies indicated that there were difficulties in

doing business with the Government that were attributable to the

Goveimment's purchasing procedures. Table 4 surtmarizes some of these

problems as perceived by the firms.

The conpanies that bid on past FSS procurements indicated that

their first bids were usually a learning experience about Government

procurements. These bids were much more time consuming and required

the services of a larger number of staff than later bids.

-6-
Table 4. Do you think Government purchasing

procedures make it difficult, or

actually discourage, doing business

with the Government? All respondents

replied "yes" . They were then asked

for more details and an account of

their past experiences.

Number of Responses

1. Specification Problems

Non-standard specifications

Specifications are difficult to meet 2

References made to specifications

not included in IFB (RFP) 1

Paperwork and Manpower Problems

Too much papen\ork (for too little profit) 2

Hard to understand ^vording of RFP 2

Too many different people and

departments must get involved in

answering an IFB (RFP) 1

Concerned with the legal ramifications

of breaking rules contained in RFP 1

Too much additional testing 1

Government requires other than usual

packaging 1

Government inspector was not familiar

with water heaters, thus requiring

additional time from ocxtpany's

officials . 2

*The total number of replies exceeds seven when one or more

companies provide more than one response.

-7-
After speaking to all seven companies it was clear that the

types of problems Vciried widely. Each ccmpany's oarplaints were

specific. There was not one comnon problem cited by a majority of

the firms.

The majority of ccmpanies participating in the survey indicated that

they do not seek Govemmsnt business. This is indicated in Table 5.

Table 5. Do you actively seek Government business?

Number of Responses

Yes 3

No 4

Five ccmpanies that were visited did not bid on the FSS

procurement, so these respondents were requested to describe the

factors that had dissuaded them from bidding. Only four of the

five non-bidders were able to answer the question since one ccrtpany

did not know about the BIIP procurement experiment until after it was

awarded. Again, it became obvious that each firm had different

problems, since no two ccmpanies cited the same reason for not

bidding. The reasons given for not bidding on the procurement are

shown in Table 6.
Tshl p fi Whpn vnii don ' t bid . what faptDT (^)

usually dissuades you from bidding?

Number of Responses

Specifications are non-standard 1

Distributors are responsible

for any bidding

1

UJLLcclXXsF. 1 C (JlcclUXXIlco 1

Quantity is not large enough to

cortpensate for the extra trouble

1

Meaningless tests are required 1

The life-cycle costing formula changed

the type of water heater that is

likely to win.

1

A "decent" profit does not appear

possible because of paperwork,

markings, and extra Government

requirements

1

The testing of water heaters was identified as a problem by one

respondent. This ccmpany felt that Government testing hindered the submission of its bid. Several coitpanies mentioned that testing for the

Government was usually more expensive than for other customers. A number

of suggestions for reducing the cost of testing Government water heaters

were made by the various catpanies. These are shown in Table 7.

Table 7. Suggestions for reducing the cost of

testing a product.

Number of Responses

Eliminate additional testing especially

for the Government

4

Reduce the number of times a conpany must

test its water heaters for the Government

1

Remove the few obsolete tests included

in the specifications

1

No suggestions 1

-9-
Most of the cxatpanies felt that at least scare of the problems

described in Tables 4 and 6 could be reduced or eliminated. The firms

interviewed generally agreed that by reducing the number of difficulties

or problems involved one vould increase the number of FSS procurement

bidders. Table 8 includes suggestions that the firms felt would

increase the number of future bidders.

Table 8. What do you think the Government

could do to increase the number of

responses to its RFPs?

Number of Responses*

Conform with AGA, ANSI, and UL

standards and specifications

3

Reduce paperwork 3

Inprove incentive by insuring

sufficient quantities purchased

1

"Convince industry that it is worth

the time and effort involved to

participate in Government

procurements"

2

Centralize purchasing within the

Federal Government to eliminate

duplication of effort on the

part of the manufacturer

to respond ;.

1

No answer. Government should not

seek to encourage participation

1

*The total number of replies exceeds seven v^en one

or more ooirpanies provide more than one response.
3.2.2 Factors in the Decision to Bid on IFB

The decision to respond to an IFB ^-^as reported to be based on one

or more of the factors shavn in Table 9.

Table 9. If you bid on a given contract, v^at

are the prime factors in the decision?

(What made you bid on this contract —

if applicable?)

Number of Responses*

Confidence in meeting the o specifications or requirOTients

Making acceptable profit 3

Existence of product that they 2 can bid and possibly win with

Life-cycle costing fits the 2

cx3ipany's iTHrketing philosophy

Quantity to be purchased 1

Geographic destinations 1

of the water heaters

No answer 2

*The total nunber of replies exceeds seven when one

or more ccrpanies provide more than one response.

All firms surveyed were asked to state v;hat criteria they would

reccnnend that FSS use in the selection of water heaters in future

procurements.

-11-
Table 10. If you were in Federal Procurement,

how vyould you purchase water heaters?

What factors vrould you use?

Number of Responses*

Life-cycle costing 2

Price (Purchase price

independent of LCC)

2

Quality of prxDduct 1

Efficiency of product 1

Reputation of supplier (will

they stay in business)

2

Warranty and service record 1

Centralized purchasing 1

AGA, UL or ANSI approval 4

Rely on GAMA to assist in writing

specifications, etc.

1

Standard delivery rate 1

*The total number of replies exceeds seven when one

or more corpanies provide more than one response.

Two respondents stated that they WDuld use life-cycle costing

as a criterion for purchasing water heaters. Several others indicated

that they would use factors that might be included in a life-cycle

costing formula, such as price, efficiency, or service record. Very

few firms agreed on the factors that the FSS should follow in

purchasing water heaters.

-12-
3.3 Life-cycle Costing (LCC)

3.3.1 The LCC Formula

The determination of the life-cycle cost as part of the IFB for

water heaters was ccfiputed by a formula. The fonmila was designed

specifically to be part of the ETIP experiment and was not taken to

represent a ccnplete formulation including all ownership costs- In fact,

the LCC formulation consisted of initial purchase price plus a discounted

cost of energy to operate the heaters for an assumed life of ten years.

As quoted from the IFB, the LCC formula is L = X + Y

"where: L = Life-cycle (present value dollars)

cost of product

X = Initial cost of product according to

price sutxnitted

Y = Present value of annual operating costs

(y) of the product over assumed expected life.

Operating cost, y, for both types of water heaters will

be ccnputed through the methods described herein. Taking

"y" and the ten (10) year product life, the present value

of the sum of operating costs, Y, will be corputed as:

Y = (sum of discount factors for years

1 through 10) y.

The discount factor sum for years 1 through 10, at a rate

of 10 percent, is 6.14. Therefore,

Y = (6.14)y

where y = irt

and i = Heat input per day expressed in "Therms."

(1 Therm = 100,000 BTU; IKWH = 3412 BTU)

r = cost per Therm (see rates for corputing

LCC in the IFB)

t = time of operation (365 days) ." 6/

The heat input per day (i) for water heaters is ccirputed as shown in

sndix E.

"TwD Step Formal Advertising for FSC - 4520 ~ Water Heaters",

Solicitation No: FPG A-FH-55515-A, September 16, 1974.

-13-
After the survey was cxaipleted it was apparent that only some of the

seven firms interviewed understood the ICC formula as it appeared in the

water heater procurement. Only three firms had spent considerable time

reading and working with the formula- Some firms had read the ICC formula,

but were unsure as to how to calculate the life-cycle cost of any of their

models. At least one firm had not even read the ICC foinmila prior to

the survey.

None of the corpanies was conpletely satisfied with the ICC formula.

One conpany felt that the costs per Therm were unfairly calculated by FSS.

A second coipany felt that the 10 percent discount factor was unnecessary,

or it should at least be a smaller amount.* A third corpany thought that

a standard delivery rate should be included. The remaining firms were unsure as to the value of any life-cycle costing formula that does not allow

for the probabilistic length of life of a water heater. The geographic

location of a water heater and the type of water used in it will affect its

length of life. Hard water, for example, is extrerrely corrosive. Only one

firm, however, indicated that in its opinion the LCC formula was of no value.

If the Government plans to continue using a LCC formula, this will be a factor in future decisions on whether or not a carpany bids. One company indicated that it did not bid because it felt that it could not ccrrpete with

other ccnpanies when the LCC formula was used. Another ccnpany claimed it

will continue to bid, but they are likely to change the model that they bid

with. Still another carpany contended that it would bid only if a LCC

formula was used.

The FSS LCC formula assumes a ten year product life. An ideal formulation for life-cycle costing would have made the ejected product life a variable in the formula. This would probably have led to difficulties that

FSS was not prepared to deal with at this time. The respondents varied on

v^t they felt is a good estimate of the average life expectancy of a water heater. Four ccrrpanies felt that the average expected life was

about 7-9 years, two believed it was 10-12, and one felt it should be

over 12 years.

Three respondents said they v\ould be interested in having FSS give a presentation on the LCC formula. The remaining four felt that such a

presentation would be unnecessary.

3.3.2 Maintenance Data

More data than is currently available vrould be needed if FSS were to

include some form of maintenance or service costs in the LCC formula. The

next question atterrpted to find out if such data is collected.

*This suggests an incotplete or inadequate understanding of the correct

concept of discount factor.

-14-
Table 11. Does your cortpany determine maintenance

data for water heaters?

Number of Responses

No (or very little) 1

Yes, during the warranty period only 6

The data collected was often limited to a record of failure rates,

during the warranty period. Seme firms collected data only for those

models sold with their own brand nan^. In most cases the finns indicated

that information such as failure rates or service calls would not be

available to FSS. One coirpany stated that they would be willing to

develop values which could be used by ETIP for a LCC formula.

3.3.3 Warranty Information

All seven corpanies indicated that, for a price, the Government could

obtain whatever warranty it desired. In most cases, warranties provided

to the Government were similar to those offered to the private consumer.

When asked if the Government makes use of its warranty, one ccrrpany

indicated that it does not, while the remaining firms were unsure or had

no experience. The records of most coipanies did not allov a ccmparison

to be made between consumer and Government warranty usage data.

The percentage of the total water heater price that reflected the

cost of a warranty depended on the length of the warranty offered. However, it usually was 1-2 percent of the total price. When asked if their

carpany would lower its bid price, if the Government waived the warranty,

four ccsTpanies said they would, while the remaining three said they would not.

3.4 Bidders Conferences

A Pre-bidding Conference was convened for the first ETIP experiment

of water heaters. The purpose of this type of meeting was to discuss

the required specifications, to answer industry's questions, and to

explain the bidding process and the LCC formula.

All of the caipanies that were interviewed felt that the industry

wDuld not openly discuss its ideas at such a conference. Several interviewees indicated that they would be very hesitant as to what they said

in front of their ccrtpetitors . Two ccxtpanies felt that bidders conferences

v^uld not be beneficial because the FSS would not respond to suggestions

made by industry.

All of the interviewees preferred individual sessions over group

meetings. Two firms said that a group meeting should be held only for

extremely large bids. One respondent said that to be effective the

meeting must be held far enough in advance of the IFB (PFP) to allow

retooling time.

-15-
3 . 5 Advertising

The discussion on advertising elicited a variety of responses.

Several firms were unsure of their answers or changed them as the

discussion progressed. At present, a GSA regulation (given in Appendix F)

prohibits a firm from advertising a Government procurement if the advertisement suggests that the Government endorses or prefers the product or

considers it to be superior to other products.

Table 12. If you were awarded a contract by FSS for a product containing a new technology, would

you want the Government to advertise this fact?

Number of Responses

Yes 5

No 2

One conpany felt strongly that FSS should advertise the ETIP award

to all Government custcxners. Another respondent took the opposite stance

and said it was not the business of the Government to advertise. Another

coipany argued against Government advertising because it felt that it

vrould be unfair to those manufacturers who did not bid.

Table 13. If a successful bidder were able to advertise

a FSS Procurement, would this be an added

incentive to bid?

Number of Responses

Yes • ' 2

Possibly, but 1

incentive probably

lies elsev\^ere

No 4

One ccmpany felt that the public should be educated on the FSS

procurement procedures. Another conpany said consumer advertising would

not assist them because their product is geared for distributors and

not for direct sale to consumers.

-16-
3.6 Engineering Considerations

All but one of the manufacturers said the capability currently

exists to produce more energy-efficient water heaters. The levels of

energy efficiency technology appeared to vary among the engineering

departments of the different firins.

Most ccnpanies agreed that substantial changes would be expensive.

Seine opportunities exist, but as one manufacturer stated, "It comes down

to whether they can accept the necessary capital investment . " The highly

efficient water heater, according to one respondent, would not be ccarpetitive unless a larger market existed for such models. One manufacturer

sumnarized by saying the industry will produce more energy-efficient

water heaters as they becone economical.

Several suggestions were made as to how to make water heaters more

efficient. Scfne of the more frequently mentioned were more insulation,

inprove grades of insulation, and reduce heat loss (Standby Loss) .

Four firms said that their engineering staff was of sufficient size

and conpetence to respond to most requirements for more efficient water

heaters. Three cortpanies said that they would need additional manpower.

A few of the engineering departments were involved in research and development (R&D) , but most of their efforts were oriented towards product

developnent. None of the firms had a separate engineering effort for

Government contracts.

Tvjo firms felt that the industry as a whole did not need to become

more energy-conscious in its design philosophy. T^ firms felt that new

specifications or standards \(^ould probably be an effective and fair

method to influence industry to produce more efficient water heaters.

4 . 0 Discussion

The FSS/ETIP procurement suceeded in bringing about the introduction of

more energy-efficient units into the marketplace. The water heater models

that were selected in the 1974 Federal procurement had not previously com- peted in the danestic market.* According to ETIP, these water heaters use

11 percent less energy than the other heaters offered to FSS during the

procurement. These models, while not new, were tailored for the FSS/ETIP

procurement, and subsequently placed in the U.S. consumer market. The

manufacturer of these models stated that it is likely that without ETIP

these water heaters would not have been made available to U.S. consumers

at this time.

It should be pointed out that other factors might subsequently have

brought about the introduction of a more energy-efficient water heater into

the consumer market. Other Government programs, such as the energy efficiercy

program and the appliance labeling program can also bring about the introduction of more energy-efficient products. These other programs though,

did not have such an irtmediate impact as the ETIP/FSS program did.

*The firm had been marketing its product in Europe.

-17-
The cxDirpanies, hcwever, differed on i±ieir opinions of the procurement.

Scane questioned whether it is the Government's responsibility to stimulate

t±ie development, production, and marketing of energy-efficient products,

and whether this vould be of any consequential effect. This is illustrated

in Table 14.

Table 14 . Do you feel that the production of appliances

in fulfillment of Government contracts will

have a substantial effect on vtot is subsequently offered in the consumer market?

i>Iumber of Responses

Yes 2

No 5

The company that won the 1974 procurement felt that the Federal Government

indirectly paid for the costs to produce such a model. Once the models

were ready for Government purchasing, it was fairly simple to offer U.S.

consumers the same models.

One ccrnpany was extremely pleased with the LCC formula. They maintained that they wouldn't participate in the bidding process without it.

However, other ccarpanies felt LCC was over-orphasized. The conpanies

were not in agreement as to whether it was possible to make a profit in

doing business with the Government. Scxne felt Government business was

profitable while others claimed it was difficult to make a reasonable

profit. All firms spoke of problems in dealing with Government procurements, but they felt that most of the problems could be reduced or

eliminated.

Part of the industry is beginning to realize that there is a market

for energy-efficient models. At least three corpanies are presently

motivated to develop more efficient appliances. It appears that ETIP is

partially responsible for redirecting ccsrpetition among products to be

an energy efficiency orientation rather than a total (electrical) pcwer

orientaticxi

-18-
APPENDIX A

ETIP Evaluation Questionnaire - Water Heaters

Date Interviewer

Name of Firm

Address

Persons Interviewed: Name Title

Total Length of Interview

Comments of Interviewee (s )

Comments of Interviewer

-19-
I. Sales and Market

1. What is the total sales of water heaters (in units)

in the U.S.? Do you have it for this year and the

two previous years? If not, where can I obtain

this data?

(Note: Only ask this question of one company.)

2. To what market is your sales effort mainly directed?

3. What percentage of your overall operation is

Government business?

4. Do you actively seek Government business?

5. How do you find out about specific Government

procurements (i.e., Commerce Business Daily;

trade assocation newsletters, etc.)?

6. WINNING BIDDERS ONLY: Will the appliance produced

in fulfillment of this contract get into the

consumer market? Is it already in the consumer

market?

NON-WINNING BIDDERS ONLY: Did you intend to enter

the appliance which would have satisfied the contract into the consumer market? Was it already

in the consumer market?

7. ' Do you feel that the production of appliances in

fulfillment of Government contracts will have a

substantial effect on what is subsequently offered

in the consumer market? Why/Why not? How?

II. Procurement Mechanism

1. Have you previously bid on a Government contract?

IF YES: Gas or electric water heater?

2. Do you think Government purchasing procedures make

it difficult, or actually discourage, doing business

with the Government? IF YES, ASK FOR DETAILS AND

SPECIFIC PAST EXPERIENCES.

3. If you do bid on a given contract, what are the

prime factors in the decision?

-20-
4. If you don't bid, what factor usually dissuades

you from bidding? IF ANSWER IS PAPERWORK, What

specifically about the paperwork: number of

copies, specific forms, etc.?

ASK FOR DETAILS.

5. What do you think the Government could do to

increase the number of responses to its RFP's?

6. Does your company treat Government business as

a separate market from consumer business? How?

In what way?

7. If the type of procurement used in this RFP

continues to be used, will it change your policies

vis-a-vis Government business?

8. Do you feel that the cost of testing your product

has hindered submission of a bid?

9. What suggestions do you have for reducing the

cost of testing water heaters?

10. What company policies, if any, will be affected

by the procurement procedures used in the ETIP

experiment? What effect? How, if at all, will

the following areas be affected?

Research & Development Related Product Lines

Design & Marketing Other

Marketing

Advertising

11. If you were in Federal Procurement, how would you

purchase water heaters? What factors would you use?

12. How would you like to see the Government construct

a life-cycle cost formula?

13. Would you be interested in receiving a Government

presentation on LCC?

14. What is the life expectancy of water heaters?

15. Does your company determine maintenance cost data

for its products? IF YES, ASK FOR DETAILS.

16. Is this data available to the Government?

-21-
17. If you were dealing with the Government, would they

get the same warranty as the consumer?

18. What percentage of your Government business makes

use of its warranty?

19. How does this compare with your consumer business?

20. What percentage of your unit cost represents a warranty?

21. If the Government didn't want a warranty, would

this be reflected as a lower initial bid?

III. Prebid Discussion ^

1. How successful do you think Bidders Conferences

would be to obtain industry inputs regarding

Government specifications?

2. Do you think industry would openly discuss its

ideas at such a conference? What are your ideas

on the topic of Bidders Conferences in general?

IV. Advertising

1. If you were awarded a contract by the Government

for a product containing new technology, would you

want the Government to advertise this fact? IF YES:

How would you prefer it to be done? IF NO: Why not?

2. If a successful bidder were able to advertise an

ETIP/FSS procurement, would this be an added

incentive to bid?

V. Engineering

1. - Do you feel that the capability exists now to produce a more energy-efficient appliance without the

need for major engineering innovations? IF YES,

What do you think is holding it back? IF NO, Do

you think there is an adequate industry-wide

engineering effort toward that end? IF NO,

What do you think is the reason?

2. How can water heaters be made more energy-efficient?

-22-
3. Is your engineering staff of sufficient size and

professional level to be able to respond to

efficiency programs utilizing current

state-of-the-art technology?

4. Is there a separate engineering effort for

Government contracts?

5. Are you engaged in any R&D effort? IF YES,

do you have a separate R&D staff? How large?

Or is R & D an additional duty of the engineering

staff?

6. What do you think can be done to encourage the

industry as a whole to adopt a new energyconscious ethic in its design philosophy?

-23-
APPENDIX B

Itie following firms participated in this survey effort.

American Ajplianoe Manufacturing Carparty

2341 Michigan Avenue

'

. Santa Monica, California 90404

A.O. Smith Corporation

P. 0. Box 28

Kankakee, Illinois 60901

Bradford White Corporation

2400 Ellsworth Street

Philadelphia, Pennsylvania 19146

Mor-Flo Industries, Inc.

18450 South Miles Road

Cleveland, Ohio 44128

National Steel Construction Conpany

P. O. Box 524

Neward, California 94560

Rheem Manufacturing Conpany

7600 South Kedzie Avenue

Chicago, Illinois 60652

State Stove and Manufacturing Conpany, Inc.

P. O. Box 307

Ashland, Tennessee 37015
APPENDIX C

August 7, 1975

Dear :

In August of last year, the Federal Supply Service requested technical

proposals and bids for water heaters. This procurement was initiated

under the Experimental Technology Incentives Program (ETIP) , and was one

of several experiments designed to investigate the efficacy of stimulating

the rate of entry of new technology into the marketplace via Government

prxx:urement procedures.

These ej^)eriraental procurements conducted by the Federal Supply Service

have not yet been evaluated to determine their effect on future product

develcfxnent; consequently, ETIP and the Federal Supply Service are seeking

to collect information to help evaluate the program. Specifically, we

wDuld like to visit your firm and speak with one or more pecple in order

to collect basic information.

The type of information we are concerned with relates to the reasons your

firm did or did not participate in this procurement. Your organization's

views on the suitability and utility of achieving accelerated product

development through this ej^rimental mechanism will also be discussed.

More sensitive information, such as your firm's future design and production plans, current R&D effort, or marketing and advertising strategies

may be discussed if it appears that this information might provide quantifiable evidence or program inpact. Because of the range of topics, discussions

with a member of both engineering and market research departments would

probably be desirable.

All information collected from participating firms will be controlled by

the National Bureau of Standards and not released in its basic form within

NBS or elsewhere. The information will be sunmarized and presented in a form that will not disclose the views, opinions or market profile of

individual participants. Participating organizations will receive

copies of the report after printing.

I hope that your firm will be able to participate in the evaluative phase

of this program. A minimum of time should be involved and the results on

the analysis could be of value to all of us. I would appreciate hearing

from you at your convenience concerning who should be contacted in regard

to the data collection aspect of the evaluation.

Sincerely,

Theodore J. Fody

Chief, Procurement Policy Area

Ej^rimental Technology Incentives Program

-25-
APPENDIX D

The Federal Supply Service is currently involved in a number of

experiments to determine whether the rate of entry of new technologies

into the consumer marketplace can be stimulated by means of Government

procurements. As part of these experiments, bids for water heaters

were recently solicited. (Shew copy of RFP)

The National Bureau of Standards has been asked to evaluate these

procurement experiments. As part of this evaluation, we are speaking with

people frcra a number of firms in the industry. We are interested in finding

out whether the procurement approach taken by the ETIP is practical and

effective, and are particularly interested in learning industry's viewpoints

on the matter. Your answers to the follcwing questions will help us in the

program evaluation. All the information you provide us will be controlled

at NBS, and will remain anonymous as to COTpany identification. The report

generated by this evaluation will be in summary form, without individual

corpanies being specifically identified; of course, your firm will receive

a copy. '

.

. .

-26-
APPENDIX E

Hie heat input per day (i) for water heaters is cxirputed for every

model bid according to the following formula:

• _ G X 8.33 X A T ^ 1 ^ ~ E 100,000

\ihere:

i = Heat consumed per day expressed in Therms.

G = Gallon daily quota of hot water (gallons/day) as determined

in accordance with FSS.

8.33 = Conversion factor (8.33 pounds water = 1 gallon water)

m = Average terrperature rise of water (°F)

E = Service efficiency (%) . Service efficiency shall be cotputed

as shown below.

"The overall service efficiency (E^) of electric and gas water

heaters shall be based on a tatperature rise of 90°F, above

rocm tenperature , determined by the following equation:

g _ Energy required to heat the daily quota _ Output

s ~ Energy required to supply the daily quota ~ Input

Where: Energy required to heat the daily quota =

1.0 BTU X °F/lb X 8.333 lb /gal x Ggal/day = 750 G BTQ/day

and

Hie energy required to supply the daily quota of water heated frcm

room temperature through a tesrperature rise of 90°F and further

capable of maintaining the stored water at the ultimate tarperature

specified above for both electric and gas water heaters =

75,000 G + 180VS - 562,500 VSG = I

-27-
Where:

I = heat consumed per day (in BTU) .

= recxDvery efficiency, percent.

V = nominal volume of stored water, U.S. gallons (data plate rating)

S = stand-by loss, percent per hour, expressed as a percentage of

the stored water above room terrperature

q = nominal manufacturer's input rating expressed in BTO per hour

(1 KWH = 3412 B1U) and,

G = daily quota, U.S. gallons of water heated through a room

tenperatiire rise of 90'*F, or

G = qV " 7/

48.06B + 0.105 qirrr"

7/"TVro Step Formal Advertising for FSC - 4520 ~ Water Heaters",

Solicitation No: FPG A-FH-55515-A, September 16, 1974.

-28-
APPENDIX F

Current clause 44 of Form 1424: Advertising of Award

"44. The Contractor agrees not to refer to awards in

commercial advertising in such a manner as to state or

imply that the product or service provided is endorsed or

preferred by the Federal Government or is considered by

the Government to be superior to other products or services .

USCOMM-NBS-DC -29-
NBS-n4A (REV. 7-73)

U.S. DEPT. OF COMM. ]. ] > ( 1 1 ( [ . 1( ; A TI ONJ ()|< K|-;|'OK'I" NO. 2. Cov't Accession

BIBLIOGRAPHIC DATA , No. SHEET NBSIR 76-983

4. TlTl.l- AND SUH'i ri LI-; A Survey of Manufacturers' Views on the ETIP Procurement

Experiment. Volume Two: Water Heaters

5. Piihllcation Date January 1976

6. Performing Organization Code

7. AUTHOR(S)

P. Clare Gocdman

8. Performing Organ. Report No. NBSIR 76-983

9. PERFORMING ORGANIZATION NAME AND ADDRESS

NATIONAL BUREAU OF STANDARDS

DEPARTMENT OF COMMERCE

WASHINGTON, D.C. 20234

10. Proiect/Task/Work Unit No.

11. C^ontract/Grant No.

12. Sponsoring Organization Name and C omplete Address (Street, City. State, ZIP)

Experimental Technology Incentives Program

National Bureau of Standards

Washington, D. C. 20234

13. Type of Report & Period Covered

r max

14. Sponsoring Agency Code

15. SUPPLEMENTARY NOTES

16. ABSTRACT (A 200-word or less factual summary of most si^ificant information. If document includes a significant

bibliography or literature survey, mention it here.)

T'hi c; reirYyr'f- rl(=>c:rT"i -{-hf^ fi rif^i ncr^ of a ^iiTVPV nf c;pvpn watPT"

heater manufacturers by the Center for Consumer Product Teclinology. The

survey was conducted for the Experimental Technology Incentives Program

(ETIP) as part of its evaluation of a Federal Supply Service (FSS)

procurement of water heaters. Survey questions were designed to obtain

manufacturers' views on the use of Government procurement policies as a

means of increasing the rate of introduction of new technologies into

the consumer marketplace. The questions covered t±ie folloving areas:

(1) reasons for partd.cipation or non-partJ.cipation of a manufacturer in

the ETIP experiinent; (2) problems t±iat a manufacturer encounters with

existing Federal procurenent practd.ces; (3) acceptability of using lifecycle costing in the bidding procedure; and (4) effect of the most

recent Goveminent procurement on present and future ccsrpany operations,

including sipport for engineering and investment in research, types of

themes used in advertising campaigns, etc. Results of the survey are

reported, and implications are drawn for future ETIP involvement in

Government procjurCTient acU-vities.

17. KEY WORDS (six to twelve entries; alphabetical order; capitalize only the first letter of the first key word unless a proper name; separated by semicolons

)

Energy-efficient products; Experimental Technology Incentives Program;

life-cycle costdLng; procurement experiments; water heaters.

18. AVAILABILITY |X~ Unlimited

1 For Official Distribution. Do Not Release to NTIS

1 Order From Sup. of Doc, U.S. Government Printing Office Washineton, D.C. 20402. SD Cat. No. C13

|X ' Order From National Technical Information Service (NTIS)

Springfield, Virginia 22151

19. SECURITY CLASS

(THIS REPORT)

is

UNCL ASSIFIED

21. NO. OF PAGES

34

20. SEC:URITY CLASS

(THIS PAGE)

is

UNCLASSIFIED

22. Price

$4.00

USCOMM-DC 29042-P74