In 1955, for example, Fortune magazine reported that United Aircraft dealt directly with as many as 7,000 subcontractors and suppliers and North American with 10,000. In all, the aircraft industry’s network of such companies exceeded 50,000.
That was from Elliot Converse’s Acquisition History Volume I. I just thought it was interesting that aerospace companies in the 1950s managed a supplier base of 10,000 strong using paper. In 2019, the entire Department of Defense contracts with just over 50,000 prime vendors, down from nearly 80,000 just ten years before.
One of the things going on is the move to a more vertically integrated structure of weapons development. Whereas there was a large number of general purpose components and subsystems up into the 1950s, defense programs started requiring unique development as part of a fully integrated weapon system.
This meant that DoD interfaced with fewer contractors itself — relying more on a single prime as the lead systems integrator. It also led to a lengthening of the supplier tiers as the primes required more tightly integrated subsystems from their subcontractors rather than buying components off-the-shelf.
This tendency towards outsourcing was also incentivized by the growing prevalence of cost-plus contracting where return on investment is maximized by outsourcing. Defense primes used to perform 60-70 percent of system work in-house, but that ratio is now flipped where they do perhaps 30 percent (mostly SEPM and final assembly).
Contractors even outsource to themselves. A different business unit of the same contractor is treated, for accounting purposes, as a separate contractor. Until relatively recently, prime contractors could make profit on top of the profit they earned as subcontractors to themselves! (This is sometimes called fee-on-fee.)
Here’s Converse again on the move from “recombinatorial innovation” to the “weapon systems” approach. Consider how technology change in the 21st century has provided the tools to solve the challenges faced in the 1950s and 60s.
The standard practice continued to be that an aircraft’s subsystems were developed independently and, if necessary, modified for compatibility with the airframe. But engines and other electronically driven subsystems such as fire control and navigation were becoming increasingly complex and normally required considerably more time to develop than the basic airframe… By 1949, the weapon system concept had come to reflect a more complex development strategy: All of the elements in a system should be designed and developed from the beginning as an integrated whole.
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