DoD Delivers A Mixed Report on the Health of the Defense Industrial Base

DoD recently released its FY 2017 Annual Defense Industrial Capabilities Report (Report). The Report presents a comprehensive overview of DoD’s assessment of key issues and risks facing the defense industrial base (DIB), generally and in specific sectors. It also discusses DoD’s plans and strategies for addressing those issues and risks. 

The Report identifies the DIB as including contractors, government entities such as government labs and GOCO facilities, FFRDCs, and universities. These entities enable DoD to produce and maintain military weapons, conduct R&D, improve information technology, maintain skills to ensure technological superiority, ensure reliable sources of material, reduce the presence of counterfeit parts, and provide essential services. 

The Report notes that while the defense sector has financially outperformed the broader equity markets, there are a number of challenges that threaten the health of the DIB. These include obsolescence, foreign dependency, fluctuating demand, industry consolidation, and loss of design and manufacturing skills for critical defense products. Those challenges can also limit innovation and reduce US competiveness in the global market place. The Report specifically notes that manufacturing’s share of total employment and GDP is at “historic lows,” resulting in shortages of well trained and capable manufacturing workers. According to the Report, “[a]ttracting and retaining a qualified workforce is imperative to sustain a healthy manufacturing and industrial base,” and it goes on to discusses steps that DoD, in collaboration with its partners in the DIB, has taken to address this issue. 

The Report also discusses DoD’s national security strategy and defense priorities. These include restoring military readiness; improving cooperation with international partners as it relates to the DIB; and simplifying and accelerating DoD’s acquisition process. 

The Report also notes the President’s July 2017 Executive Order on assessing and strengthening the DIB and on supply chain resilience. [Steptoe’s advisory Executive Order Addresses the Defense Industrial Base and Supply Chain Resiliency is available here]. According to the Report, DoD is participating in an interagency process to assess the DIB and make recommendations pursuant to that EO. The interagency task force was expected to make policy, regulatory and legislative recommendations to the President in April 2018, but those recommendations have not yet been released. 

The Report includes an extended discussion of DoD’s Manufacturing and Industrial Base Policy (MIBP) office, established by the FY 20111 NDAA. The MIBP is a principal advisor to the Undersecretary of Defense of Acquisition, Technology and Logistics and is charged with identifying, assessing, mitigating and monitoring risks to the DIB. The MIBP is also involved in industry outreach, participation in the CFIUS process on behalf of DoD, and providing input to the DoJ and the FTC on defense industry M&A activities. The MIBP office also provides oversight to DoD’s Manufacturing Technology (MANTECH) program which seeks to identify and promote the development of new, cutting edge manufacturing technologies and processes.  

Finally, the Report includes an analysis of 10 different sectors in the DIB – aircraft, C4; electronics; ground vehicles; material; munitions; radar and electronic warfare; shipbuilding; space and the DoD’s “organic industrial base” (maintenance depots, arsenals and ammunition plants).  The Report identifies the functions and products of each sector, as well as the sector’s principal suppliers and DoD programs. It also identifies sector specific risks and DoD’s risk mitigation efforts, including support for lower tier suppliers. For example, in discussing the electronics sector, the Report notes that electronics are “a key component of all modern defense programs.” It acknowledges that electronics has a global supply chain and states that the “high degree of interdependency among suppliers has profound implications for DoD.” Accordingly, it identifies assuring supply chain integrity as a key issue for DoD, with respect to both custom DoD parts and COTS items. Related issues include protecting against the theft of DoD intellectual property and maintaining DoD’s ability to access leading edge technologies, including having trusted domestic sources. The Report also identifies obsolesce and counterfeit electronic parts as important issues in the electronics sector. Finally, it goes on to address various efforts undertaken by DoD to address the various issues affecting this sector.  The Report includes similar analyses for the other sectors. 

The Report reflects DoD’s most recent assessment of issues and risks facing the DIB and actions necessary to address and mitigate them. It merits careful review by contractors at all levels of the DoD supply chain.