'Virtual Supply Chains' Could Help Bridge Manufacturing Gaps
Zylstra, Steven G., Thompson, Dennis, National Defense
The Defense Department has immediate needs for thousands of products for which no domestic supplier can be found. Further, about a third of spare-parts shortages for Navy and Air Force aircraft and engines are attributed to "manufacturing issues."
Because America's manufacturers do not fully meet the need, defense agencies and their prime contractors are turning to foreign manufacturers to fill the gap. As natural a step as this may seem in today's global economy, it has left the U.S. reliant on nations that could suspend production or cancel delivery as the result of policy disputes.
To understand the current situation, it is helpful to explore both ends of the manufacturing supply chain the defense prime contractors and original equipment manufacturers (OEMs) at the ordering and receiving end, and the smaller manufacturers who traditionally have served as their vendors at the supply end.
For the last two decades, OEMs have been withdrawing--sometimes gradually, sometimes precipitously--from much of the direct manufacturing aspect of their industries. Prior to that, large manufacturers preferred to fabricate and assemble most elements of their products internally.
The automotive industry pioneered the shift to outsourcing functions, with vendors responsible for production and delivery of most components. The development and refinement of electronic commerce provided an important impetus for the new approach, as it gave faster tools for communication and collaboration to OEMs, and some of their main tier-one vendors.
It has taken the better part of 20 years, but the new model, with its promise of more efficient resource allocation, has become the rule rather than the exception. It is now the norm in defense industries as well. OEMs remain responsible for the broad design of their products, for research and development for final assembly. They are system architects ,and system integrators. But once they hand off the specs to their vendors, smaller companies manage most of the manufacturing. So it is fairly easy to see why the country's largest manufacturers alone cannot meet America's defense needs: They no longer are primarily direct manufacturers.
At the other end of the equation, small and mid-sized manufacturers have been under prolonged pressure from the primes and OEMS in their quest for better prices and fewer vendors to enhance efficiency.
Small manufacturers--those that employ fewer than 500 people--represent 90 percent of firms contracted in leading defense sectors. Such companies, historically the backbone of defense procurement, receive 21 percent of prime contracts and 41 percent of all subcontracts the Pentagon awards to businesses.
Small businesses have spent the last decade eliminating waste from their systems, adding value for customers, adopting lean manufacturing principles and improving their processes in dozens of other ways, only to find that many of their heretofore best customers continue to source much of their work in lower-cost countries.
Those small manufacturers that have survived have grown tentative, unsure if they can justify investment in new product development or improvement, because in the current environment, they cannot predict what the return on their investment might be.
Many, small and mid-sized producers are reluctant to pursue government work with its customary months of idle time awaiting qualification, contract reviews and initial payments. Just as significant, an alarming number of manufacturers have not invested in technology upgrades, depending instead on legacy systems that allow them to putter along. This tentativeness on the part of manufacturers helped to produce our so-called "jobless recovery," when companies waited as long as they could to create and fill positions for fear that the economy would relapse.
Large defense primes and OEMs no longer manufacture, and small firms are" no longer interested in supplying them and probably could not, even if they desired, because their technology, infrastructure is insufficient. …