Here’s a conversation with John Norman, VP at Raytheon of USAF airpower requirements and capability and former USAF major general, on the Aerospace Advantage podcast.
John “Slick” Baum: The missile budgets are always run way too thin. If we ever got into serious conflict, we’d deplete our stocks in no time and industry would have a really hard time meeting demand. And the DOD has pressed everyone to build lines for efficiency, not war time elasticity. So are there new production techniques and technologies in these newer missiles that would allow us to better surge the enterprise if the events demanded it?
Jon Norman: That’s that’s a great question is one that I think across industry we struggle with every day. Certainly, [for] all of US defense industry, they don’t operate at a loss very long. And we have to answer the Wall Street certainly. But you know, our focus is always on that warfighting customer. And so we try and be as as absolutely efficient as we can, oftentimes, that drives supply chain to behaviors where it’s just-in-time supply.
Of course the US defense industry won’t operate at a loss long. If DoD won’t pay for it, then they won’t invest in the capital. That’s why you hear industry so often say — just tell us what your requirements are! Traditional industry follows DoD, they do not try to build a product or production capability they hope DoD will need. This assurance of cash flow and optimization of capital investment has made defense industry profitability quite safe. Back to John Norman:
So we’ve talked about some things with with the Department of the Air Force over the past few weeks, as we’ve gotten further into support for the conflict in Ukraine. And we’re getting them to consider acquiring weapons differently. If we’re able to break out the materiel. And we have the service do an advanced buy of the material, that lets us put all these suppliers — the US has a lot of challenges with diminishing manufacturing sources — it lets us put them on contract where they can order the material, they keep their workforce actively engaged, and they can operate at a peak efficiency for their factory. And we can still work with the Air Force for that lot buy and they can they still have the point of leverage with the defense industry for that, that we have to meet cost-schedule-performance. But it puts us well ahead of the game as far as being able to ramp up production very, very fast. Ideally, we do multi-years, that’s the best way to drive savings.
I’m not entirely sure how that is different than long-lead items, or advance procurement, which has the following DFARS definition: “Advance procurement” means an exception to the full funding policy that allows acquisition of long lead time items (advance long lead acquisition) or economic order quantities (EOQ) of items (advance EOQ acquisition) in a fiscal year in advance of that in which the related end item is to be acquired.” There’s kind of a complicated process of debiting and crediting fiscal year accounts associated with it. Perhaps advance procurement is normally used for ships, but not munitions, and the idea is to expand its use.
I’m also a bit surprised he doubled down on Multi-Year Procurements given the way inflation is going. I’d guess he likes MYP as a process to get long-run clarity on quantities, but would prefer fixed-price economic price adjustment contract types to protect themselves against inflation. DoD recently indicated it won’t adjust firm fixed price contracts due to inflationary pressures. Actually, a fixed price EPA would also protect the government from having too much risk built into the contractor’s cost estimates.
What kind of price index would the EPA clause use? If the missile/munitions supply base doesn’t really reflect commercial markets, then it might just be based on actual cost of the materials — which is really much like a cost-reimbursable contract. The FAR has three types of fixed-price EPA:
- Adjustments based on established prices. These price adjustments are based on increases or decreases from an agreed-upon level in published or otherwise established prices of specific items or the contract end items.
- Adjustments based on actual costs of labor or material. These price adjustments are based on increases or decreases in specified costs of labor or material that the contractor actually experiences during contract performance.
- Adjustments based on cost indexes of labor or material. These price adjustments are based on increases or decreases in labor or material cost standards or indexes that are specifically identified in the contract.
In any case, it can take hundreds or even thousands of days to close a major negotiated contract. All that time negotiating is time the supply chain is standing around. Here’s John Norman again:
Supply chain crisis hasn’t helped the problem. We’re seeing some electronic components that had a 60 day lead time, go to 700 days now. And that’s that’s one of those key points that we’ve discussed with the Air Force on the need the breakout, that long lead material and have as a separate contract. And let’s do that the first quarter of a fiscal year, and then let our contracts battle on the lot buy after that, but let’s get the material all in order so that when the contract is let, then we can build and we can build at rate.
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