Supply chain efficiencies worked financially, but did they come at a cost?

The performance and stability of supply chains is one of several “vital signs” to watch in gauging the health and wealth of defense companies across the industrial base.

Only second to workforce and people matters, supply chains may also be the most-talked about and stressed-over topic for everyone in the government market during a period of the pandemic that coincides with inflation and shortages of all sorts of items.

So perhaps it is no surprise that improvements in the supply chain were wiped out wiped out in the past years, according to the 2022 National Defense Industry Association Vital Signs report.

NDIA’s 2022 edition of Vital Signs, compiled in partnership with Govini, scored the supply chain at 63 out of a possible 100, down from the 71 reading in the 2021 report.

Only one area within the supply chain category earned a higher grade as contract failure climbed 10 points to  a grade of 37. The improved score coincides with a year-over-year decline in contract terminations for cause from 394 in 2019 to 164 in 2020.

Pretty much everything else under the supply chain category got lower scores: financial performance sunk 36 points to 38 and inventory fell 8 points to 75. Cost management did hold perfect at 100 though.

The COVID-19 pandemic has certainly brought global supply chain issues to the forefront. But during a press briefing Wednesday, leaders from NDIA and Govini pointed out that supply chains already had underlying structural problems that predated the pandemic.

For one, just about every industry and vertical in the economy has adopted practices that are best described as “just in time” shipping and delivery, along with having as lean an inventory as possible.

Those approaches help wring out extra costs from the enterprise that can then be reinvested in other areas of a business. Reliance on foreign sources for raw materials and other items to make systems is also something every industry including defense has done.

But has doing all of that come at a cost to the defense industrial base?

NDIA President and CEO Hawk Carlisle said companies with both a commercial and defense side, as well as those solely focused on defense, brought in just in time practices because it was economically rewarding and helped create value for shareholders.

Carlisle pointed out that NDIA and others studied supply chains in the past even when considering “what COVID did in highlighting and accelerating some of the challenges.”

“In the case of national security and the defense industrial base, there’s got to be mitigation, so in some cases you’re going to have to find a way to remove those vulnerabilities for things like ‘just in time,’ transportation or foreign-sourced,” Carlisle said. “It may have an effect on the bottom line of a company and shareholder value, but it’s got to be incentivized by the government.”

The Vital Signs report does not prescribe any solutions such as specific mitigation methods or ways for the government to incentivize more flexibility and resilience in the industry’s supply chains.

Wes Hallman, senior vice president of strategy and policy at NDIA, said that resilience needs to become a part of how financial performance is gauged.

“It’s going to take a combination of many things to create that buzzword that I think is appropriate and that’s ‘resilience,’” Hallman said. “If you’re at those single-point failures, that shouldn’t be a business model, at least on the defense industrial base side of the house.”

Hallman said that predating the pandemic, discussions over visibility and resiliency in supply chains were being driven from a defense industrial base study mandated by White House Executive Order 13806 that was signed in July 2017.

One driver of those discussions and debates that have accelerated during the pandemic was over what items should be re-shored for manufacturing and production in the U.S., and in some cases shore-shifted to another trusted location.

The tension in that debate is highlighted by the fact that it has to be feasible for companies though. Given that financial implication, Hallman said “it doesn’t make sense to economically bring back everything.”

Govini CEO Tara Murphy Dougherty characterized the Defense Department and industrial base’s current challenge as an “iron triangle” that covers efficiency, resiliency and exclusivity in the supply chain.

Not all of the commercial-like resiliency in defense supply chains has been to the industry’s detriment, she said.

Such practices have benefited the defense enterprise given the “very nature of the need that the defense community has” in needing to mobilize quickly and have assured supply chains, she said.

But mitigation has to happen with that efficiency, she said.

“In some places, the department might decide that the efficiency is well worth the risk and optimize along that point of the triangle,” Dougherty said. “In other places, the risk needs to be mitigated in some way and resiliency is really important.”

Then there is the triangle’s third point of exclusivity, which Dougherty said comes into play for emerging technologies the U.S. wants to own.

“Whether there are critical allies and partners who are incorporated in that or the supply chain is completely on-shored, I think that triangle… is one way to make this somewhat intractable problem solvable,” she said.