2.5 Industrial Base Concerns

During the 2010 Association of the United States Army (AUSA) Winter Symposium and Exposition Mike Cannon, Vice President for Ground Combat Systems at General Dynamics Land Systems, provided a bleak outlook for the Abrams tank industrial base.  The major concern was that the program build is scheduled to be finished in the middle of 2013 with no follow-on production program planned or in place.  Couple that with a lack of spares procurement and you have an industrial base capability that may be forced to go dormant.  Once a production line goes cold it is very expensive to revive.  This section will address several common industrial base concerns.

Critical to the success of any program is the ability of the acquisition team to understand the capacity to produce, the capability to produce, and the financial stability required to produce the items required by our warfighters. 

Capability looks at the "ability to produce."  It answers the question "does the contractor have the necessary manpower skills, machines, facilities, material and methods to produce at the item in question?"

Capacity looks at "rate and quantity."  It answers the question "does the contractor have the ability to produce the item at the rates required by the warfighter, and can they meet surge requirements?"

Financial stability looks at the "viability of the firm" from an accounting and balance sheet perspective.  It answers the question "does the company have the financial resources and financial stability to see to the program through completion?"

The program office should assess the impact of programmatic decisions on the national and international NTIB supporting U.S. defense to satisfy the requirements of 10 USC 2440 and DFAR Subpart 207.1. Overall Industrial Capabilities Assessments (ICAs) should address critical sub-tier, as well as prime contractor capabilities and should include:

• New and unique capabilities that must be developed or used to meet program needs;
• Identifying DOD investments needed to create new or enhance existing industrial capabilities. This includes any new capability (e.g. skills, facilities, equipment, etc.);
• Identifying new manufacturing processes or tooling required for new technology. Funding profiles must provide for up front development of manufacturing processes/tooling and verification that new components can be produced at production rates and target unit costs;
• Identifying exceptions to FAR Part 45, which requires contractors to provide all property (equipment, etc.) necessary to perform the contract;
• Program context in overall prime system and major subsystem level industry sector and market;
• Strategies to address any suppliers considered to be vulnerable;
• Risks of industry being unable to provide new program performance capabilities at planned cost and schedule;
• Alterations in program requirements or acquisition procedures that would allow increased use of non-developmental or commercial capabilities;
• Strategies to deal with product or component obsolescence, given DOD planned acquisition schedule and product life;
• Strategies to address reliability issues (i.e., tampering, potential interrupted delivery from non-trusted sources, etc.) associated with commercial components for sensitive applications; and
• Strategies to utilize small business, including small disadvantaged business, women-owned small business, veteran-owned small business, service-disabled veteran-owned small business and small businesses located in Historically Underutilized Business Zones.

Capacity is normally constrained by physical facilities, available productive equipment, tooling and/or test equipment. The portion of this capacity actually utilized is determined by the demand on the plant for current and known future workload. Firms engaged in the defense industry must be particularly aware of a need for excess capacity because its customer's (military) demands tend to be somewhat unstable over time.

While not specific to the Acquisition Strategy, program offices and the Military Services are encouraged to resolve identified industrial capability and capacity issues at the lowest level possible. However, there are cases when issues may impact more than a single program or Service. A program office should elevate an industrial capabilities matter via their Program Executive Officer to the Office of the Deputy Under Secretary of Defense (Industrial Policy) when an item produced by a single or sole source supplier meets one or more of the following criteria (even if the program office has ensured that its program requirements can and/or will be met):

• It is used by three or more programs;
• It represents an obsolete, enabling, or emerging technology;
• It requires 12 months or more to manufacture; and
• It has limited surge production capability.

Where and how you get your sources of material can be a vital concern for PMs. Having just one sole source, single source or foreign source in your supply chain could be a show stopper, especially if that item is a critical item that significantly impacts the capability of the system to perform its mission.

A sole source is one in which there is only one source for that item.  There are no other alternatives.  What happens if that sole source goes bankrupt or goes out of business for any reason?  What happens if this situation happens overnight, like the plant burns down?  What are you going to do to keep your program from being stopped in its tracks?

A single source is one in which there is only one "qualified" source.  This condition is slightly better than the sole source situation as there are other companies capable of making your item, they just have not been "qualified" as a source.  Qualification can be an expensive and time consuming process.  If you find yourself in a sole or single source situation you may want to consider an investment strategy to get a second source qualified, now do you not only have a backup source, you have competition.

A foreign source is one that is outside of the U.S. industrial base.  Remember that Canada is by law a part of the U.S. industrial base.  Foreign sources carry with them many problems.  The transfer of some intellectual information to companies outside of the U.S. can be restricted by International Traffic in Arms Regulations (ITAR) making it difficult to do business outside of the U.S.  In addition, some countries restrict the types of items that their companies can sell to the U.S., for example items that go into nuclear programs are often restricted by countries with strong nuclear concerns.  Sometimes politics can play a role and an item that is available this week may not be available next week due to political pressures. If you have a foreign sources item that is critical to your program, you might want to consider funding a second source, a U.S. source.

Lead times for defense materials and components can be long and volatile. There are various reasons for this situation, such as:

• Imbalances between capacity and demand;
• Competition from commercial suppliers;
• Poor quality and lack of process improvement;
• Production bottlenecks;
• Long testing cycles;
• Raw materials not available;
• Long contracting process;
• Lack of funding;
• Transportation; and
• Labor issues.

Lead times are severely impacted by capacity limitations. As orders increase beyond existing capacity, the contractor has the option to increase capacity or to add new orders to backlog. For a contractor with a reasonably steady demand and no capacity expansion, increasing backlog increases lead time. When these lead time increases are communicated to customers, their response to the lead time is to issue orders immediately to ensure material availability. With constant capacity, these new orders must also be added to backlog, which must then be reflected in increased lead time. As this self-fueling process, often called the lead time capacity syndrome, continues, a relatively small increase in demand can result in extremely large increases in lead times.

Some commodities, like electronics, have long lead times.  In the case of electronics, especially space qualified electronics, it is the testing that makes the items have a long lead issue.  Steady-state life testing is performed to demonstrate the quality and reliability of devices by subjecting them to specified operational conditions over an extended period of time.  The standard steady-state life test is 1,000 hours for many items.  Corrosion testing can take up to 240 hours, and burn-in testing could be as long as 700 hours. Many space qualified electronic devices have a lead time measured in months, often due to testing requirements and lack of competition.

Natural disasters, such as the earthquake and tsunami that hit Japan in 2011 displaced nearly half a million people and severely disrupted production operations in Japan for many industries.  The impact to production was so severe that automobile production for Toyota, Honda and Nissan were all slowed down, even at U.S. plants due to the lack of parts.

The area of component and material lead time is extremely critical to meeting program schedules and defining long lead and advanced buy requirements. The program office should maintain continuing visibility of the current status of and the forecast changes in lead times.

A factor that is unique to defense plant and equipment requirements is the excess capacity that must be established and maintained in order to provide for surge or mobilization capability. For example, during the wars in Iraq and Afghanistan the need for Mine Resistant Ambush Protected (MRAP) vehicles was tremendous.  Lives depended on the ability of the defense industry to rapidly expand its manufacturing operations in support of on-going missions.

The following factors should be considered to improve planning for surge/mobilization:

• Planning should be highly selective. Products that would be required and could be supplied should be identified.
• Critical parts and essential manufacturing machinery, rather than just end items must be effectively planned. Planning must be done for the long lead items, the parts for which there are only a few suppliers, or the particular machinery that is already in use on three shifts.
• Critical labor categories must be examined since this could be a large potential problem. Planning must include other demands on this labor, including military reserve requirements.
• More research and development work needs to be sponsored to find substitutes for the many critical materials on which we are presently foreign dependent. Advances in manufacturing technology could aid in alleviating this problem. 
• Purchases should be funded of all items which would significantly affect mobilization capability but would not significantly reduce peacetime defense production. An example would be buying long lead time parts one or two years in advance.

Most of the defense industry prime contractors have some excess plant capacity to gear up in the event of mobilization or surge, but the lower tiers, the parts suppliers and subcontractors, often represent the bottlenecks in mobilization capability.  In developing these plans it is important to remember that different primes may depend on the same subs for "surge."  The industrial base assessment needs to look at the entire supply chain in order to identify all risks.  Below are some of the risks associated with surge capabilities:

1. Surge production capacity may be available at the prime level at a reasonable cost subject to these conditions:
   1. A number of second and third tier suppliers could become choke points; 
   2. Continued reliance on offshore capability for low cost labor processing, some unique products and coproduction could lead to major disruptions; and
   3. Critical materials, if not stockpiled and supplied as required, could become production stoppers.
2. The major output drivers are the basic availability of production capacity (production and test equipment, manpower, material, energy, etc.) at the prime and subtier level. Waivers and deviations can contribute to accelerated production and, in specific instances, perpetuate major bottlenecks if not granted.
3. Early funding may be a real need to build subcontractor capability and to support increased demand for subcontractor and prime working capital.

Mobilization involves preparing for war or other emergencies through assembling and organizing national resources; and the process by which the military services, or part of them, are brought to a state of readiness for war or other national emergency. This includes activating all or part of the Reserve components, as well as assembling and organizing personnel, supplies, and material.

Diminishing Manufacturing Sources and Material Shortages (DMSMS), the loss of sources of items or material, surfaces when a source announces the actual or impending discontinuation of a product, or when procurements fail because of product unavailability. DMSMS may endanger the life-cycle support and viability of the weapon system or equipment.

Compared with the commercial electronics sector, the Department of Defense (DOD) is a minor consumer of electrical and electronic devices. While the electronic device industry abandons low-demand, older technology products, the DOD seeks to prolong the life of weapon systems. These conflicting trends cause DMSMS problems as repair parts and/or materials disappear before the end of the weapon system life cycle. Although electronics are most likely to be discontinued, obsolescence of non-electronic and commercial off-the-shelf (COTS) items also poses a significant problem to weapon systems. In short, DMSMS is a threat to system supportability.

Solving DMSMS is complex, data intensive, and expensive. There are two approaches to solving DMSMS in a system: reactive (you address DMSMS problems after they surface) and proactive (you identify and take steps to mitigate impending DMSMS problems). DOD policy prescribes the proactive approach.

An effective proactive DMSMS program does the following:

• Ensures that all parts and material to produce or repair the system or equipment are available;
• Reduces, or controls, total ownership cost (TOC);
• Minimizes total life-cycle systems management (TLCSM) cost;
• Eliminates, or at least minimizes, reactive DMSMS actions;
• Evaluates design alternatives;
• Provides for risk mitigation as it applies to DMSMS;
• Evaluates more than one approach to resolve DMSMS issues; and
• Collects metrics to monitor program effectiveness.

DMSMS discontinuance notices alert PMs that production is concluding for a specific part (i.e., the part is about to become unavailable). The notices usually contain part numbers, last order and shipment dates, minimum order quantities, and sometimes national stock numbers. To receive a problem notification, the program office must first know their parts and be working with the various organizations that can provide discontinuance notifications. Notifications of a DMSMS problem typically come from any or all of the following sources, depending on program phase:

• Government Industry Data Exchange Program (GIDEP);
• Defense Supply Center Columbus (DSCC);
• Government repair activities;
• Part manufacturers; and
• Original equipment manufacturers (OEMs).

Because of the numerous sources for notices, the potential exists for inaccurate, duplicate, or late arrival of notices to the cognizant program office. A notice may arrive at a program office as early as when a manufacturer begins to plan the discontinuance of a device or as late as years after a device has been discontinued.

GIDEP has been designated as the central repository within the DOD for all discontinuance notices. GIDEP receives documented notices from parts manufacturers or GIDEP participants about parts or production lines that will be discontinued. After receipt of a notice, GIDEP prepares and distributes alerts through subscriber activities within the DOD and to member organizations in private industry.  GIDEP alerts usually contain part numbers, last order and shipment dates, minimum order quantities, and national stock numbers. To become a GIDEP subscriber, program offices contact the GIDEP Operations Center in Corona, California. Their internet home page is http://www.gidep.org.

DSCC is a procurement and supply activity for the Federal Government and is an inventory control point for material managed by the Defense Logistics Agency (DLA) in Ft. Belvoir, Virginia. DSCC provides discontinuance notices to program offices for electronic components and assists in identifying resolutions for DMSMS electronic devices. For life of type (LOT) buy purposes, DSCC assists calculating demand and reviewing alternatives. Program offices work with DSCC when programs are in the sustainment phase.

Government repair activities may issue internal government alerts following "no bid" or "not available" responses to equipment or part procurement efforts during repair of systems during sustainment. In these cases, a technical referral is usually generated on a DLA Form 339, Request for Engineering Support and forwarded to an inventory control point (ICP), which may pass the information to an in-service engineering agent (ISEA) for further review and analysis. Contact with ICP and ISEA technical referral personnel may be necessary to obtain specific alert information from these organizations.

Part manufacturers may notify the OEMs and the program offices via letter or phone if they are a known customer. They also notify GIDEP, DSCC, and commercial database subscription services that their parts are, or will soon be, discontinued. Many part manufacturers have web pages that provide details and suggestions for possible replacements on parts that they discontinue. Program offices access these sites periodically to obtain information about parts availability.

OEMs send discontinuance notices when part manufacturers or government agencies are not direct purchasers of a part. For example, alerts may be originated by OEMs when a component manufacturing contract cannot be filled because a supplier has provided them a discontinuance notice on a part needed for a contracted component. Some OEMs also provide discontinuance notices on their web pages, which can be accessed periodically. To ensure receipt of OEM notifications, program offices usually insert appropriate requirements and clauses in system sustainment support and production contracts.

The key to DMSMS risk mitigation is prevention, and a successful DMSMS program will involve several elements:

• Senior Management Support;
• Establishment of a DMSMS Management Team;
• Use of Predictive Tools;
• Accurate Bills of Materials (BOMs); and
• Financial Resources.

Management buy-in (commitment) is crucial to the DMSMS program. The interest of senior leaders ensures that the acquisition disciplines (engineering, logistics, management, contracting) will support the DMSMS program. One method for securing cooperation from managers of both the customer (program office) and the supplier is to conduct periodic DMSMS management reviews.

DMSMS is collaborative and multidisciplined; therefore, a DMT is fundamentally important. The DMT composition could include any combination of disciplines—managers, engineers, technicians, logisticians, and other skill types—and organizations, including support contractors, original equipment manufacturers (OEMs), prime contractors, and other government organizations such as the Defense Logistics Agency–Land and Marine (DLA-L&M) or Defense MicroElectronics Activity (DMEA). The DMT needs a plan to guide the DMSMS program. The team will need adequate resources to ensure success.

Use of a predictive tool is integral to finding DMSMS in electronic components in the configuration. All predictive tools monitor the status of electronic components in the BOM and forecast their obsolescence. Each tool has different loading criteria and output and report formats. The DMT should carefully select the tool that is right for its program based on needs and cost.

A BOM is a list of the subordinate parts (electronic, electrical, mechanical) in an assembly (e.g., an SRU/SRA or a subsystem assembly). Without it, forecasting, impact analysis, component analysis, and other DMSMS-related activities are not possible. An indentured BOM depicts the top-down breakout relationship of parts to the next higher assembly components (from system to box to board). A flat-file BOM lists parts without indenturing relationships. An initial task of the DMT is to (1) obtain the BOMs (from the integrating OEM), (2) develop them from available data, or (3) negotiate for access to contractor-owned technical data packages (TDPs), technical manuals (illustrated parts breakdowns), and engineering change proposals (ECPs).

Ideally, funding for DMSMS would be available early in the development of a program—when the design is most cost-effective to influence—to ensure that the DMSMS management program is properly resourced. The cost of implementing resolutions is generally not part of the DMT funding. It typically comes from research and development funds or operation and support funds. DMSMS corrective action projects must be prioritized with all other program needs. To be competitive, the case for spending money to fix DMSMS must be compelling.

The Strategic and Critical Materials Stock Piling Act (50 U.S.C. 98) requires that a stockpile of strategic and critical materials be acquired to decrease and preclude dependence upon foreign sources of supply in times of national emergency.  Authority for management of the operational aspects of the National Defense Stockpile has been delegated to the Defense Logistics Agency, Defense National Stockpile Center (DNSC). Policy oversight remains with the Under Secretary of Defense (Acquisition, Technology & Logistics).

During World War II and the Korean conflict, the concept of a stockpile was to provide a secure source of industrial raw materials for suppliers to process, so fabricators and subcontractors could provide parts and components needed to manufacture weapon systems and to maintain basic essential industries. Although his concept is still important, the United States is moving away from a basic materials intensive society. Whereas the stockpile was an insurance foundation of fundamental raw materials upon which the industrial base could rely, today's need is increasingly focused on selective applications throughout the various tiers of manufacturing to make up for lost capacities in order to support surge of the weapon and equipment production lines which will exist at the time of national emergency.

Beginning with the early 1990s, the Department of Defense determined that over 99% of the inventory on-hand was excess to the Department's needs and Congress authorized its disposal. From then until the end of Fiscal Year 2009, DNSC had $6.493 billion in sales, over $4.360 billion of which was transferred to various military programs or the General Fund of the Treasury.  Reductions in the number and quantity of stockpiled materials have led to a corresponding reduction in the DNSC infrastructure. DNSC has reduced the number of its operating depots, is closing out leased storage sites, and is reducing its workforce.

While DNSC has been drawing down its inventory, questions have arisen as to the need for a stockpile. As a result of concerns over the availability and access to various raw materials, Congress directed that DOD review its current stockpile disposal policy and determine whether the National Defense Stockpile is properly configured to assure future availability of materials for defense needs in light of current world market conditions. In January 2008, the USD(AT&L) established a working group to review the findings of the previous studies and the issues raised by Congress. The conclusions of the working group included that the current DOD policy for disposal of stockpiled materials needed to be revised to reflect today's global marketplace, and that the NDS should be reconfigured into the Strategic Material Security Program (SMSP) to encompass the full range of responsibilities required to develop an integrated, comprehensive approach to strategic materials management.

In conjunction with the formation of the working group, sales of certain commodities were suspended or curtailed. Each of the materials selected has no viable substitute, is a material with respect to which the U.S. is wholly or substantially import dependent or is a commodity that faces significant risk of supply disruption. Pending the outcome of the current policy review, sales of the following commodities were suspended to retain remaining quantities in the NDS inventory: Niobium/Columbium, Tantalum Carbide, Platinum, Iridium, Tin and Zinc. Sales of the following commodities were curtailed to hold a goal quantity (the equivalent of one year's Annual Materials Plan (AMP): Beryllium, Cobalt, Ferromanganese, Ferrochromium High and Low Carbon, Tungsten Metal Powder and Ores and Concentrates, and Germanium. Competitive sales offerings will continue for these materials until the goal quantity is reached. The suspension or curtailment of sales of these commodities is contingent upon meeting the previously mandated statutory financial requirements from the sales of these commodities.