In early October, an Interagency Task Force led by the Department of Defense (DoD) released a report Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States (Report). The Report was prepared pursuant to the President’s July 2017 Executive Order on the defense industrial base (DIB), which established the Task Force. [Steptoe’s Advisory on the Executive Order is available here]. The Report echoes many of the themes in DoD’s April 2018 FY 2017 Annual Defense Industrial Capabilities Report. [Steptoe’s Advisory on the April DoD Report is available here.]

Major Findings

The Task Force (at 5, 19-44) identified five "macro forces" that present "an unprecedented set of challenges" to the DIB: Sequestration and uncertainty of government spending; decline of critical markets and suppliers; unintended consequences of government acquisition "behavior;" aggressive industrial policies of competitor nations (particularly China); and the loss of vital STEM and trade skills in the domestic work force. The Task Force concludes that taken together, these macro forces "erode the capabilities of the manufacturing and defense industrial base and threaten the Department of Defense’s (DoD) ability to be ready for the 'fight tonight,' and to retool for great power competition."

The Task Force (at 5, 45-51) also concludes that those macro forces create 10 "risk archetypes distributed throughout the [DIB]." These include sole sources and single sources (only one source that is able or qualified to provide the required capability); fragile suppliers and fragile markets; foreign dependency; capacity constrained supply markets; diminishing manufacturing sources and erosion of US based infrastructure; US human capital issues; and product security.

The Task Force's Report (at 3) includes four "major findings":

  • Macro forces have led to impacts primarily in the sub-tiers of the defense supply chain;

  • Many sectors continue to move critical capabilities offshore in pursuit of competitive pricing and access to foreign markets.

The Task Force's Report also includes a detailed Appendix (at 63-103) that discuss the status, risks and challenges in numerous "sectors" of the DIB, including, aircraft, shipbuilding, ground systems, munitions and missiles, electronic warfare, space, cyber security, materials and software.

Recommendations

The Task Force also developed a number of recommendations (at 4-5, 54-55) to address investment, policy regulation and legislation: Those recommendations include:

  • Creat[ing] an industrial policy in support of national security efforts, as outlined in the National Defense Strategy, to inform current and future acquisition practices;

  • Expanding direct investment in the lower tier of the industrial base through DoD's Defense Production Act Title III, Manufacturing Technology, and Industrial Base Analysis and Sustainment programs to address critical bottlenecks, support fragile suppliers, and mitigate single points-of-failure;

  • Diversifying away from complete dependency on sources of supply in politically unstable countries who may cut off US access; diversification strategies may include reengineering, expanded use of the National Defense Stockpile program, or qualification of new suppliers;

  • Working with allies and partners on joint industrial base challenges through the National Technology Industrial Base and similar structures;

  • Modernizing the organic industrial base to ensure its readiness to sustain fleets and meet contingency surge requirements;

  • Accelerating workforce development efforts to grow domestic science, technology, engineering, mathematics (STEM), and critical trade skills;

The Task Force also notes that DoD has made additional recommendations that are included in a classified Action Plan which also directs DoD "to conduct a comprehensive study on the industrial base requirements needed to support force modernization efforts, specifically focused on the technologies necessary to win the future fight."

Selected Items of Interest to Contractors

While contractors should carefully consider the entire Report, we provide some additional detail on the following three topics:

Sequestration and Appropriations Uncertainties

The Report (at 20-24) details the adverse effects on the DIB of sequestration and uncertainties in government spending, including reliance on Continuing Resolutions. For example, it states that defense spending uncertainty can inhibit capital investment and investment in R&D. It can also diminish the ability of companies to hire and retain skilled workers, adversely affect production capabilities, as well as the viability of suppliers, and create production and cost inefficiencies. The Report discusses examples of effects of budgetary uncertainties in the shipbuilding, military aircraft and ground systems sectors of the DIB. The Report also notes that budget uncertainties can adversely affect suppliers of operations and support services and DoD’s own organic base (GOGO facilities) “to the detriment of readiness.” Finally, the Report states the reliance on Continuing Resolutions and the threat of sequestration have exacerbated the effects of uncertainties in defense spending and "hamper[ed] DoD's ability to develop a more lethal force." It notes, in particular, a reduction of 17,000 prime vendors to DoD between 2001 and 2015, and that the "[s]pecialty manufacturers critical to defense platforms have been especially hard hit."

Government procurement policies and practices

In its discussion of government procurement policies and practices, the Task Force (at 32-34) notes that "[c]hallenges [to] working with DoD and other US government customers, including contracting regulations, policies, barriers to entry, qualification challenges, programmatic changes, and other problems, can lead to adverse effects on suppliers." It comments, in particular, on difficulties that commercial/non-traditional company’s encounter in dealing with DoD including the complexity of the acquisition process, lengthy contracting timelines and inexperienced DoD contracting officials. It focuses in particular on compliance with the Cost Accounting Standards and the "inflexibility" of contracting under FAR Part 15 which it states also requires "strict compliance" with CAS. In that regard, the Task Force goes on to observe that "requiring a customized accounting system creates the need for additional resources, for which many companies cannot make the business case." The Task Force also cites the time and costs associated with obtaining (and complying with) certifications, for example, for IT systems, software and security clearances, as presenting additional hurdles issues for doing business with the government.

The Task Force goes on to note that "[o]operational and information security standards and whistleblower protections are important, but nonetheless impose additional costs that may increase barriers to entry." Finally, the Task Force (at 52) states that it supports "the work of the 'Section 809' panel and development of the adaptive acquisition framework . . . to streamline and improve defense acquisition processes."

Decline in US manufacturing capabilities and capacity

The Task Force (at 24-31) describes the overall decline in the size of the manufacturing industrial base since 2000, including declines in employment and skills; the decoupling of design and manufacturing as offshoring of manufacturing increases; loss of production of strategic and critical materials; risks of counterfeit parts; and diminished technological innovation and ability to capture emerging technologies as domestic manufacturing declines.

The Report (at 42-43) also notes that retention and recruitment of employees is an issue in the manufacturing sector and states that the decline in employment of mid-career manufacturing employees (ages 35-44) is the "most concerning aspect of manufacturing workers demographics" and that it "poses a direct threat to the long-term viability of [domestic] manufacturing." To address these workforce issues the Department of Labor, together with DoD and the Departments of Education and Commerce, is tasked (at 55) to, among other things "assess potential incentives to recruit and retain workers to enter and/or stay in the industrial base, such as tuition reimbursement;" "[c]reate or foster comprehensive training and education programs;" and "[w]ork with states to reduce occupational licensing barriers" to facilitate the ability of people with critical skills to relocate to regions where skills, particularly production and maintenance, are needed.