Mike Petters, President and CEO of Huntington Ingalls Industries: “Lack of resiliency comes from an overemphasis on efficiency at expense of risk management. I was on the board of a local hospital. If a hospital wants more beds for surge capacity, it has to go through many muscle movements with local government. The same is true with the DoD supply chain. The FAR [Federal Acquisition Regulation] is designed to protect the taxpayer interest, but the FAR chooses efficiency over risk management. It costs more, but the cost provides insurance against risk. That’s a conversation industry and government must have. 80 percent of submarine suppliers are sole source. The DoD needs to create resiliency there.”
Jeb Nedaner, DASD Industrial Policy: “We value efficiency, but we also value effectiveness. We need to rethink that balance in the FAR and as a country.”
That was from a panel discussion at the GMU/DAU 2020 Conference on supply chain resiliency. Be sure to register for the Nov 10 module where I will host a great panel on acquisition and procurement!
In some ways, it sounds efficient for 80 percent of nuclear submarine suppliers to be sole source. That means there’s the bare minimum in terms of capital equipment, facilities, labor, and so forth, required to build or maintain the systems that only the DoD buys. It’s a cost-minimization exercise, which actually makes sense in a predictable, low volatility environment.
However, the DoD operates in a highly volatile environment. DoD budgets are marked by a cycle of major peaks and valleys. A primary capability of the DoD is surging capacity to meet emergency demands. Just like the health system must prepare for a once in a hundred-year pandemic like Covid-19, the DoD has to be prepared to a once in a hundred-year war. Check out the video below based on a blog post I wrote discussing how the government can start managing the risk of industrial mobilization. Be sure to watch the whole thing!
Consider some worrisome statistics from the DoD’s Industrial Capabilities report:
- US machine tool production dropped from first to sixth in the world. DoD is reliant on foreign machine tools that have one- to three-year procurement lags.
- There are four suppliers able to manufacture large single-pour aluminum and magnesium sand castings for military aircraft.
- Over 80 percent of Army and Marine Corps combat vehicle production is consolidated on one assembly line facility.
- There are only two domestic suppliers of solid rocket motors. Two contractors account for 97 percent of DoD missile procurement funding. One GOCO facility is the only domestic source for most DoD explosives.
- Three domestic suppliers dominate radar and four dominate EW systems. US share of electronics market fell from 25 percent in 1998 to 5 percent in 2015.
- The Navy’s four public shipyards are all over 100 years old, and Norfolk’s capital equipment is 15 years past average service life.
As we’ve seen with Covid-19, money is of no concern during times of emergency. What matters is real resources available to meet the demand. And from an industrial perspective, Covid-19 was very limited in terms of scope and complexity compared to a major war. Even then, FEMA reported that the supply of N95 respirators won’t catch up to demand until January 2021. The Strategic National Stockpile had only 13,000 ventilators at the start of Covid-19, requiring a scramble to put nearly 200,000 ventilators on contract by the federal government.
The DoD relies on a much more complex supply chain than what is needed to respond to a pandemic, and will tax not just the productive capacity of end items but of raw materials. For example, during WWII, the wartime demand for synthetic rubber went from about 3,000 long tons to 922,000 — a 288x increase. Aviation gasoline increased 130x, TNT 40x, magnesium 30x, and aluminum 7x.
In order to manage the risk of black swan events like wars and pandemics, the government must do two things. First, it needs to invest in the upstream production process. Usually, the DoD procures weapon system end items and allows the supply chain to work itself out. Facilities and capital equipment costs are reimbursed through overhead rates, which are viewed as an expense to be minimized. The DoD should instead fund infrastructure and enabling tools as dedicated programs in their own right. Better tools foster innovation and cost reductions.
Second, the government needs to adopt commercial practices. When Covid-19 hit, a slew of emergency procedures in the Federal Acquisition Regulation kicked in. Non-FAR contracts like Other Transactions were encouraged by Congress to accelerate the discovery of a vaccine. If the government waits until an emergency strikes for it to loosen regulations, then there is a greater risk of fraud, abuse, or simply confusion leading to poor outcomes. The flexibilities used in a crisis need to be ingrained in the culture of organizations — its hard to flip a switch with respect to procurement practices. And indeed, the National Defense Strategy sure frames the geopolitical environment as one that is crescendoing into an emergency.
Government agencies cannot streamline their processes for what is efficient in normal times. They have to absorb some inefficiency in order to have surge capacity and other protocols for the worst times — those that pose existential risks to the nation. There does not seem to be a rigorous debate yet on buying capabilities that do not result in weapons end items, but provide a foundation for rapid expansion of output should a crisis emerge. It’s time to make industrial mobilization cool again!
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