Executive Order Addresses the Defense Industrial Base and Supply Chain Resiliency

Noting that a strong industrial base and resilient supply chains are critical to the economic strength and national security of the United States, the President on July 21 signed an Executive Order (EO) on Assessing and Strengthening the Manufacturing and Defense Industrial Base and Supply Chain Resiliency of the United States.

What the EO Does

The EO notes that supply chains today “are often long and the ability of the United States to manufacture or obtain goods critical to national security could be hampered by an inability to obtain various essential components.” As a result, “the United States must maintain a manufacturing and defense industrial base and supply chains capable of manufacturing or supplying [essential] items.” The EO cites “the loss of 60,000 American factories, key companies, and almost 5 million manufacturing jobs since 2000” as a threat to the country’s ability to meet national defense requirements.

To address this concern, the EO orders a government-wide study of the defense industry. The first study will be a comprehensive assessment of the state of manufacturing and supply sources in the United States. This assessment is to include (a) identification of the civilian and military material and other products critical to national security; (b) manufacturing capabilities essential to producing these critical products; (c) contingencies “that may disrupt, strain, compromise, or eliminate the supply chains of these goods;” (d) the resiliency of the manufacturing and defense industrial base upon the occurrence of these contingencies, considering a wide range of factors (e.g., single points of failure, workforce skills, supply chains in nations that are likely to become unfriendly or unstable, and the availability of substitutes); (e) the causes of any such deficiencies. The report should then recommend legislative, regulatory and policy changes as appropriate, based on a cost/benefit analysis, to avoid or prepare for the identified contingencies, ameliorate supply chain deficiencies, and strengthen the industrial base. This report is due within 270 days of the date of the EO.

Supply Chain Attention

The critical importance of the DoD’s supply chain was emphasized in two programs presented by the Public Contract Law Section at the American Bar Association’s Annual Meeting in New York City last week. One panel, New Directions in Government Procurement, discussed pressures on the defense industrial base that may result from the President’s Buy American EO issued in April [Steptoe’s advisory Buy American Executive Order Brings Greater Attention to Contractor Supply Chains is available here]. A significant point made is that today’s defense supply chain has been built on the current rules and regulations, and significantly relies on foreign suppliers. If these rules and regulations are changed after the analyses mandated by the Buy American EO, the DoD’s current supply chains could be impacted.

Another panel, New Challenges for Supply Chains in Federal Contracting, noted the globalization of the supply chain serving the DoD, a point emphasized in the recent EO. (It is an interesting - and perhaps insoluble - question whether this globalization is the cause or the effect of the loss of domestic factories and manufacturing jobs identified in the supply chain EO.) The panelists also covered the strong enforcement environment that exists and the extensive requirements placed on prime contractors and higher tier subcontractors to police their subcontractors. The panel discussion raised the concern that these “policing” requirements placed upon prime contractors may be limiting the number of contractors who can (or are willing to) fulfill the role of prime contractor.

A recent case before the Armed Services Board of Contract Appeals (ASBCA) addressed the government’s assertion that a prime contractor’s responsibility for subcontractor management includes the duty to act in the shoes of the government and perform contract administration functions that are not required by the terms of the prime contract. In that case, the ASBCA rejected an attempt by the government to disallow costs based on an overbroad interpretation of a prime contractor’s responsibility to manage its subcontractors. [See Steptoe’s advisory ASBCA Invalidates Broad Interpretation of Prime Contractor Responsibility for Management of Subcontractors available here].